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In re Delaware Hosiery Mills Inc.

decided: April 1, 1953.


Author: Kalodner

Before MARIS, McLAUGHLIN and KALODNER, Circuit Judges.

KALODNER, Circuit Judge.

On April 1, 1949, Delaware Hosiery Mills, Inc., a Delaware corporation ("debtor") engaged in the sale of hosiery and underwear by mail order in Philadelphia, Pennsylvania, filed a voluntary petition for an arrangement under Chapter XI of the Bankruptcy Act*fn1 in the United States District Court for the Eastern District of Pennsylvania.

The cause was referred to a bankruptcy referee. Receivers were appointed and leave given to them to continue operation of the business. Upon petition the receivers obtained leave by Order of the District Court to borrow $10,000.*fn2 Prior to the entry of the Order and on the basis of the fact that it was then being applied for, Joseph B. Fitzpatrick, one of the receivers, had loaned the latter $5,000.

Following entry of the Order the Northwestern National Bank in Philadelphia ("Bank") discounted the receivers' note for $5,000. The obligation on the note was subsequently reduced by the receivers to $4,500. The business was operated for several months at a substantial loss and when it became apparent that an arrangement could not be consummated the debtor was adjudicated a bankrupt, and its assets liquidated. The Bank filed a Proof of Claim averring priority in the amount of $4,500.

The funds realized from the liquidation were insufficient to repay the receivers' loans, their debts for merchandise supplied them and costs of administration.

The Referee in the Order of Final Distribution placed the $4,500 indebtedness to the Bank, the balance of the indebtedness to Fitzpatrick (reduced to $2,500) and an overdraft of $66.57 in the receivers' checking account with the Bank in the same class with receivers' debts for merchandise and services rendered to them and the allowances for compensation and court costs, and directed pro rata distribution.*fn3

The District Court dismissed the Bank's Application for Review and affirmed the Order of the Referee.

In its appeal from the District Court's action, the Bank urges that it is entitled to priority over all other costs of administration. It premises its claim to priority on the fact that it made the loan to the receivers in reliance on the District Court's Order granting leave to the receivers to borrow, and that as a consequence it enjoys priority under the provisions of Section 344 of the Bankruptcy Act,*fn4 and that Section 64(a) of the Bankruptcy Act*fn5 relied on by the Referee is inapplicable.

The loans in question were apparently not made on receivers' certificates as provided in Section 344 of the Bankruptcy Act, but under the authority of the general powers of the Court (See 8 Collier, 14th Ed. page 842). However, we do not consider this material inasmuch as in either method, the terms and conditions of the loan would be spelled out. The credit extended to the receivers or trustees is regarded as an expense of administration (Collier ibid). Of course, it may be possible for the receivers' certificate or the authorization of the Court to provide terms for priority or subordination of the loan - generally provision is made either for parity with other expenses of administration or subordination to same.*fn6

There was no express provision in the authorization given by the District Court in the instant case as to the order of priority of the borrowed money with respect to the other costs of administration and we will not construe the language of the decree as giving the creditor any such priority. The tendency has always been in equity to protect the compensation of receivers and their counsel even to the extent of giving them priority over receivers' certificates, In re Columbia, Ribbon Co., 3 Cir., 1941, 117 F.2d 999, 1002, and Ball v. Improved Property Holding Co., 2 Cir., 1917, 247 F. 645, 651.

Paragraph 378 of the Bankruptcy Act*fn7 provides that upon the entry of an order directing bankruptcy following a petition for an arrangement, the proceedings shall be conducted as far as possible and in the same manner and with like effect as if a voluntary petition for adjudication had been filed and adjudication had thereunder. It therefore follows that the general provisions of the Bankruptcy Act would be applicable and in particular Section 64, sub. a, would govern the distribution.

It is well settled that there can be no priorities within the priority classes enumerated by Section 64, sub. a, of the Bankruptcy Act. (See the comprehensive opinion of ...

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