In re Wilmington Speedway

• Decision Date: 14 November 1958
• Docket Number: No. 1554.,1554.
• Citation: 167 F. Supp. 630
• Parties: Matter of WILMINGTON SPEEDWAY, Inc., Debtor.
• Court: U.S. District Court — District of Delaware

167 F. Supp. 630

Matter of WILMINGTON SPEEDWAY, Inc., Debtor.

No. 1554.

United States District Court D. Delaware.

November 14, 1958.

Vincent A. Theisen and Aubrey B. Lank, Wilmington, Del., for Wilmington Speedway, Inc. Albert W. James and Arthur J. Sullivan, Wilmington, Del., for Hessler, Inc.

LAYTON, District Judge.

Hessler Realty and Development Co. (Hessler) and Wilmington Speedway, Inc. (Speedway) entered into a lease on November 29, 1951, whereby certain property 1½ miles south of Wilmington on the duPont Parkway was leased to the latter. The lease was for a period of five years from May 1, 1952, until April 30, 1957. An automobile track for stock car racing was erected upon the premises together with grandstands, light standards, etc. Under the terms of the lease, these latter installations were to remain the property of Speedway.

On December 31, 1953, Speedway's petition for reorganization under Chapter X of the Bankruptcy Act (11 U.S.C.A. § 501 et seq.) was approved and an Order entered permitting it to remain in possession. Speedway operated the premises until January 7, 1957, when it was adjudicated a bankrupt. At that time, rent under the lease had accrued and remained unpaid in the sum of $2,579.68. From January 7, 1957, until March 8, 1957, when the trustee rejected the lease, rent had accrued and remained unpaid in the sum of $833.32. The fees of the attorney for the debtor in possession, together with the expenses of the trustee in bankruptcy and Hessler's claim for rent exceed the amount available for distribution.

The first question is whether or not the fees and expenses of the attorney for the debtor in possession (Petitioner) share pro rata with the expenses of administration of the bankruptcy. The answer depends upon whether the rentals from the lease are an expense of administration. Except for the leasehold, the trustee would have been put to the expense of moving and storing grandstands, light standards and other fixtures pending their sale in a situation where their only value, except perhaps junk value, was as attached to the race track. Since the trustee was able to sell the fixtures for $5,000 to the new lessor of the premises, it is a fair conclusion that the lease aided the trustee in preserving the assets of the estate until the sale of the fixtures to the new lessor was consummated. I decide that the rental was one of the costs of administration in the liquidation proceeding. Compare 3 Collier on Bankruptcy (14 Ed.) § 62.14, pp. 1503-1504.

Prior to 1952, § 64, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a, gave priority to all costs and expenses of the bankruptcy, both reorganization and liquidating, without designating any particular order of priority between them. Thus, prior to 1952, the fees of the attorney for the debtor in possession would have been entitled to payment on a pro rata basis with all the other priorities enumerated therein. As said by the Third Circuit Court in In re Columbia Ribbon Co., 117 F.2d 999, 1001:

"* * * Consequently all administration expenses, whether incurred during the reorganization period or during the liquidation period and whether for costs and expenses or for services, must share pro rata in the funds available for payment."

In 1952, however, Sec. 64, sub. a was amended by the insertion of the following language (11 U.S.C.A. § 104):

"* * * Provided, however, That where an order is entered in a proceeding under any chapter of this title directing that bankruptcy be proceeded with, the costs and expenses of administration incurred in the ensuing bankruptcy proceeding shall have priority in advance of payment of the unpaid costs and expenses of administration, including the allowances provided for in such chapter incurred in the superseded proceeding * * *."

The purpose of this amendment was to preserve funds for the payment, ahead of all prior costs of administration, of the costs of bankruptcy so that there would be no breakdown in the orderly closing of the bankrupt's estate.¹

The petitioner argues that the effect of the 1952 amendment above quoted was no more than to guarantee priority (ahead of all other expenses of administration of the bankruptcy) to such liquidating costs as bond and insurance premiums, those incurred in conducting public sales and compensation for the services of the referee, trustee, and fees of the latter's attorney. Certainly, he contends, there is no expressed intention to include in this class of priorities such expenses as a landlord's rental. In justification he points to the language of the Committee reports² as sustaining his contention. But it is significant that this language is not exclusive in character. It is preceded by the words "such as", meaning for instance. Other proper expenses of the administration of the bankruptcy are obviously contemplated. In many cases, trustees have been forced to rent facilities for the storage and preservation of valuable personal property pending its sale.³ If payment for rentals such as this were not accorded priority over expenses of prior Chapter X proceedings, landlords could not be found to rent such facilities and there might be serious loss resulting in a breakdown in the closing out of the estate. At the risk of repetition, it is proper to point out that Hessler's property was put to enforced use under the reorganization proceeding, first in order to see if Speedway could be brought out of its financial difficulties, and, finally, under the liquidating proceeding, to maintain a status quo so that its facilities, such as grandstands, etc., pending sale, did not have to be severed from the realty and thus be reduced to scrap value. True, Hessler did not suffer because, with the sale of the facilities, came a new lease. But this was fortuitous and the fact remains that the value of the facilities was maintained and $5,000 instead of, perhaps junk value, realized therefrom. I can only conclude that Hessler's claim was a cost of administration within the meaning of the 1952 amendment. To hold otherwise might in some future case lead to a breakdown in the administration of a liquidating bankruptcy proceeding.

The trustee's total costs in liquidation including referee's costs were $454.58. It is my conclusion that this sum together with Hessler's claim of $833.32 constitute costs of administration in the liquidating bankruptcy proceeding and under the 1952 amendment both have priority over petitioner's claim for legal fees during the reorganization.

Deducting these sums from the amount on hand, there remains four thousand odd dollars for distribution. The petitioner's claim for fees as attorney for the debtor in possession in the sum of $5,000, together with out-of-pocket expenses, is reasonable and, moreover, is virtually unchallenged. Is he, as he maintains, entitled to the balance or, as the lessor argues, should the two claims share pro rata in the remainder?

Upon purely equitable considerations, petitioner contends that his claim is entitled to share ahead of Hessler's as to the balance of the fund. Apparent authority exists for this statement. For instance, Collier Bankruptcy Manual, 2d Ed., § 64.102 2 states:

"Claims for expenses incurred or services rendered by non-bankruptcy officers or other persons in preserving the estate prior to bankruptcy present another question. § 64 sub. a(1) with reference to costs of preserving the estate has nothing whatever to do with the problem. Section 64 sub. a(1) creates a priority for debts arising from `the actual and necessary costs and expenses of preserving the estate subsequent to filing the petition.' We have already seen, however, that claims for expenses or compensation with respect to persons who have acted for the benefit of the estate prior to bankruptcy may be allowable on general equitable principles. Where a nonbankruptcy receiver, assignee or similar liquidating or statutory officer has such a claim, it has been indicated that he has an equitable lien on the funds or property in his hands which may be satisfied by a deduction from such property when turned over to the bankruptcy court or which may be paid out of the property

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