In re Universal Medical Services, Inc.

• Decision Date: 27 April 1973
• Docket Number: No. 70-456.,70-456.
• Parties: In the Matter of UNIVERSAL MEDICAL SERVICES, INC., Bankrupt.
• Court: U.S. District Court — Eastern District of Pennsylvania

357 F. Supp. 1137

In the Matter of UNIVERSAL MEDICAL SERVICES, INC., Bankrupt.

No. 70-456.

United States District Court, E. D. Pennsylvania.

April 27, 1973.

Allen W. Stewart, Alan L. Reed, Morgan Lewis & Bockius, Philadelphia, Pa., for King of Prussia Park Trust.

Marvin Krasny, Adelman & Lavine, Philadelphia, Pa., for trustee in bankruptcy, Irving H. Kutcher.

HIGGINBOTHAM, District Judge.

OPINION

I. Introduction

This matter is before the Court on a certificate for review of a Bankruptcy Judge's order¹ relegating a portion of the landlord's claim to a fifth priority status in accordance with Section 64(a)(5) of the Bankruptcy Act, 11 U. S.C. § 104(a)(5) and denying the landlord's request that the particular claim be allowed in full and accorded a first priority standing pursuant to Section 64(a)(1) of the Bankruptcy Act, 11 U. S.C. § 104(a)(1).² Specifically, the question presented is whether a receiver, who is appointed in a Chapter XI proceeding, should be required to pay the landlord as a cost of administration the fair rental value of the premises used and occupied by him effective as of the initial date of such use and occupancy? More succinctly worded, or at least, phrased differently, should the receiver be liable as an administration expense for his pro rata share of the rent when his appointment and occupancy commenced on the fifth day of the month but the rent was due and payable in monthly installments on the first day of each month?

In seeking this review, the claimant-landlord asks this Court to reconsider the decision of In re Celian, 41 F.2d 560 (E.D.Pa.1930) which, while not only being the law of this district and circuit for over forty years, was authored by Judge William H. Kirkpatrick, a distinguished jurist for whom I, as well as my other colleagues on this Court, have always regarded with the highest esteem and utmost respect.

Though Celian is endowed with the vintage of forty-three years of precedent, nevertheless it has neither been cited by nor received the imprimatur of the Court of Appeals of this Circuit. Thus, because of its vintage, having been authored by Judge Kirkpatrick, I feel compelled to respect it, but not required to follow it. In fact, from today's increasing concern of equity, justice and fair play, I reject Celian. I find the "anti-Celian" cases more persuasive and adopt them. The receiver here does not speak with the voice of equity or fair play. After having used the landlord's premises to preserve the estate, the receiver must pay his "dues". I hold that he is liable to the landlord for the reasonable and fair value of the premises he used.

In some ways, it would be an injustice to the stature of the late Judge Kirkpatrick to perpetuate this precedent simply because he was one of the most revered judges in the nation. For even great judges can not always speak for eternity on all issues. For reasons hereinafter set forth, I decline to follow In re Celian.

II. Background³

On August 5, 1970, Universal Medical Services, Inc. hereinafter referred to as the "Bankrupt" or "Universal" filed a Petition for an Arrangement under Chapter XI of the Bankruptcy Act and thereafter, having failed to file a Plan of Arrangement, was adjudicated a bankrupt on October 20, 1970. At the time of the filing of the Chapter XI Petition on August 5th a receiver, Irving H. Kutcher, who was appointed to preserve the estate, entered into the premises then being leased by the bankrupt and occupied same until December 17, 1970. When the order of adjudication declaring Universal to be a bankrupt was issued on October 20th, the receiver then became the trustee in bankruptcy.

On August 5th, Universal was the lessee of the premises owned by the Trustees of King of Prussia Park Trust (hereinafter referred to as the "Landlord" or "Lessor") under a lease agreement dated April 1, 1970. The lease provided for a term of ten years with an annual fixed rent of $112,500, payable in monthly installments of $9,375 on the first day of each month, together with all applicable real estate taxes as "additional rent." Clause VII of the lease further provided that in the event Universal should default in the payment of the "fixed rent for more than ten days, or . . . commits any act of bankruptcy or files a petition under any bankruptcy or insolvency law . . Lessee shall be deemed to be in default hereunder, and: (a) Lessor may immediately or at any time thereafter and without demand or further notice make entry and repossess, . . . and thereupon this lease shall terminate . . . ." It is undisputed that the landlord, pursuant to Clause VII of the lease, did not "make entry and repossess."

Of the three claims filed by the landlord in the bankruptcy proceedings, only a portion of Claim 294 is challenged and contested in this review of the Bankruptcy Judge's order of August 17, 1972.⁴ Claim 294, which embraced the time period of August 5, 1970 to October 20, 1970, was filed as a cost of administration claim pursuant to Section 64(a)(1) of the Bankruptcy Act for the use and occupation of the landlord's premises by the receiver during the aborted Chapter XI proceedings.

For the period September 1, 1970 to October 20, 1970, the Bankruptcy Judge allowed the landlord $18,395.24 as a use and occupation expense in accordance with Section 64(a)(1) of the Bankruptcy Act, less the amount of $9,375 paid by the receiver, or a net sum of $9,020.24. This disposition of the foregoing elements of Claim 294 is not here questioned. What is disputed, however, is the treatment of the period August 5, 1970 to August 31, 1970. Instead of according the landlord a first priority status as a cost of administration under 64(a)(1) of the Bankruptcy Act, the Bankruptcy Judge, in reliance upon In re Celian, 41 F.2d 560 (E.D.Pa.1930), allowed $9,738.63 as a rent priority claim pursuant to Section 64(a)(5) of the Bankruptcy Act. It is only that section of the Bankruptcy Judge's order which is challenged in this review.

III. Discussion

For forty-three years In re Celian has been the law of this district and circuit and has been generally uniformly followed here, although the ruling has been repeatedly rejected by other circuits, which have been called upon in recent years to consider the same issue, as well as being criticized in scholarly treatises and by legal commentators.

In Celian the bankrupt was a lessee of premises whose lease provided that the rent be payable in monthly installments on the first day of each month. On June 10, 1929 a petition in bankruptcy was filed and a receiver appointed, who occupied the bankrupt's premises from June 10 to June 27, 1929. On the date of the filing of the petition, the rent had neither been paid on June 1st nor for the two prior months and therefore the tenant was in default under the lease. The landlord filed (1) a rent priority claim against the receiver for the period June 1 to June 10th and (2) an administration expense claim for use and occupancy by the receiver from June 10th to June 29th.⁵ The Bankruptcy Judge disallowed the use and occupation claim but granted the landlord leave to file an amended proof of claim as a rent priority for the entire month of June.

Judge Kirkpatrick, in a two-page opinion, which contained no citations of authorities whatsoever articulating the legal underpinnings for this ruling, affirmed the Bankruptcy Judge, stating:

"On June 1, the tenant was in default but was in possession of the premises. By the sixteenth paragraph of the lease, the leasehold could have been terminated at the option of the lessor upon this or any other default. The landlord, however, did not elect to avail himself of this right. There was nothing in the lease which required him to do so, or which automatically terminated the lease upon failure to pay rent. The landlord on June 1st had the right to allow the lease to remain in force and accept the tenant's obligation to pay the rent (secured by his preference under the law of Pennsylvania in event of the tenant's bankruptcy). This is what he did. . . . The point is that on the 10th of June, when the receiver was appointed, the tenant still had the right of possession for the entire month of June. To this right the receiver succeeded. By virtue of it he was entitled to occupy the premises until the end of June or possibly until the landlord declared the lease forfeited as of an earlier date (as such forfeiture apparently was not declared this latter point is not material). For such possession he was not liable to pay the value, nor may the amount be claimed against him for use and occupation as an expense of preserving the estate." 41 F.2d at 560-561.

Since the legal precedents for Celian were not clearly enunciated, one can only conjecture as to the possible authorities underlying the result reached therein. One can advance the contention—and cogently so—that Judge Kirkpatrick was adhering to the common law rule that rent is payable on the date designated and is non-apportionable. Therefore, a receiver who occupies a bankrupt's premises subsequent to the date on which the rent is due, could be subrogated to the interests of the tenant for the remainder of the rental term in question. In order for one to have a clear understanding as to the state of the law on this subject in 1930, I have sketched below some of the decisions written prior to Celian.

A. Pre-Celian Decisions

In 1909 the Second Circuit adopted the position which is contra to Celian. In the case of In re Youdelman-Walsh Foundry Co., 166 F. 381 (2d Cir. 1909), a petition in bankruptcy had been filed on September 16th, with a receiver being appointed and occupying the bankrupt's premises from then until November 25th. The bankrupt's lease there required that rent be payable on the first of each month. The Court at p. 382 commented:

"The receiver contends that he is not liable for rent prior to the 1st of October, inasmuch as he insists that the landlord has a

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