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IN RE EINHORN BROS.

March 23, 1959

In the Matter of EINHORN BROS., INC., Bankrupt


The opinion of the court was delivered by: CLARY

This matter is before the Court upon the Referee's Certificate of Review upon objections of a secured creditor to the Order of Final Distribution which disallowed a claim for priority. The facts out of which the present controversy arose may be briefly stated as follows: Einhorn Bros., Inc., (the 'Bankrupt'), and Textile Banking Company, Inc., hereinafter called 'Textile' (the objecting secured creditor), consummated an agreement whereby Textile, in return for loans made, obtained a security interest under the Uniform Commercial Code of Pennsylvania in the bankrupt's merchandise inventories. This interest was perfected by filing in January 1957. Textile also purchased the bankrupt's accounts receivable. There is, however, no dispute concerning Textile's right to the proceeds of these accounts.

On November 12, 1957 the landlord levied a distraint for rent against the property of the bankrupt in the amount of $ 55,183.62 (excluding costs). Textile thereafter, on November 18, instituted an action of replevin with bond for the goods subject to its security interest. While a writ of replevin was issued and served also on November 18, the goods were never replevied. Later, on the same day, the debtor filed a petition for arrangement under Chapter XI (11 U.S.C.A. 701 et seq.), subsequently converted into a proceeding in bankruptcy. The bankruptcy court issued an order which effectively restrained the execution of the writ of replevin. Textile never attempted to vacate this order. The inventories were accordingly processed, finished and sold in the arrangement proceedings. The resulting proceeds amounted to $ 23,065.16. The total fund available for distribution was $ 45,985.14 including $ 10,287.56 derived from collection of the accounts receivable.

 In addition to those of the landlord and Textile, the following claims were presented: (a) costs and expenses of both the Chapter XI and bankruptcy proceedings; (b) wages, including a claim on behalf of the health and retirement fund of the employees' union; (c) unemployment contributions and interest due the Commonwealth of Pennsylvania; (d) withholding and social security taxes owing to the United States; and (e) other secured creditors. The total of the various claims far exceeded the fund in the possession of the trustee.

 The referee held that the lien of the landlord was a statutory lien which, under § 67, sub. c(1) of the Bankruptcy Act, 11 U.S.C.A. § 107, sub. c(1), was subordinated in payment to the costs of administration and wage claims. Applying the doctrine In re Quaker City Uniform Co., 3 Cir., 1956, 238 F.2d 155, certiorari denied, 1957, Delsea Corp. v. Flickstein, 352 U.S. 1030, 77 S. Ct. 595, 1 L. Ed. 2d 599, the referee then concluded that the interest of Textile, being inferior under Pennsylvania law to that of the landlord, was impliedly subordinated by § 67, sub. c(1). The referee further concluded that the claim of the Commonwealth was also entitled to payment prior to Textile.

 Textile now assigns as error the subordination of its security interest to wages and costs of administration, and the superior position attributed to the Commonwealth's claim. No objection is made concerning the treatment afforded Textile with reference to the other claimants. For reasons hereafter explained the Court is of the opinion that both the landlord's claim and that of the Commonwealth constituted statutory liens superior under applicable Pennsylvania law to the security interest of Textile. Therefore, Textile's claim was properly subordinated under the Quaker City doctrine to both costs of administration and wages.

 Textile has advanced numerous arguments relating to the landlord's lien with a view to avoiding the impact of Quaker City. Initially, it argues that the notice of distraint served upon the bankrupt did not include the inventories in question. The notice listed numerous items of machinery and equipment, and 300 dozen children's dresses. The amount of inventory not specifically listed does not appear. In addition, a printed provision of the notice states 'together with all and singular the goods and chattels on the premises sufficient to pay the rent and costs.' Textile invokes the ejusdem generis rule to negate the all-inclusive effect of this 'catch-all' clause. The rule, normally utilized in connection with statutory construction, embodies the proposition that general words which follow specific ones are to be construed to refer to objects similar to those specifically enumerated. The specific words indicate the class of objects, while the general words encompass all within the class. See 2 Sutherland, Statutory Construction §§ 4909-14 (3d ed. 1943). The effect of this rule in the instant case is far from clear; for part of the inventory, the dresses, was specified. Regardless of this, the rule is but an aid rather than a categorical imperative. All the goods on the premises were subject to the landlord's distraint; and it would be somewhat anomalous to suppose that he intended to restrict the coverage of his levy. This is particularly true in light of the fact that the landlord was attempting to distrain for an amount exceeding the value of everything on the premises. In advancing a contrary construction, Textile emphasizes the fact that the rent claim was later reduced in the bankruptcy proceedings -- a subject which will be discussed later -- to $ 1,054.11. But this is surely irrelevant since the issue presented is the coverage of the notice at the time of the levy.

 Textile next takes the position that when the goods were replevied and Textile's replevin bond posted, the lien of the landlord was discharged and transferred to the replevin bond. This contention overlooks the fact that the goods were not replevied; a restraining order, which Textile never attempted to vacate, was issued on the same day by the bankruptcy court. The bond posted by Textile was predicated upon the assumption that possession of the goods would be acquired; it was to serve as security for such possession. Since possession was frustrated by the restraining order, Textile could not have been held on its bond. The bond never took effect due to the intervention of the bankruptcy court, thereby precluding discharge of the landlord's lien.

 Textile's principal contention is that the landlord forfeited his lien by distraining for an excessive amount. As noted previously, the distraint was for a sum in excess of $ 55,000; while the lien recognized by the referee for rent due without acceleration was for $ 1054.11. Textile relies upon In re Mount Holly Paper Co., 3 Cir., 1940, 110 F.2d 220, and J. J. Pocock, Inc., to Use of G.M.A.C. v. Levy, 1938, 130 Pa.Super. 94, 196 A. 869. The Pocock case is completely inapposite; it dealt not with forfeiture of a lien, but with a scheme between the tenant and the purchaser at a distraint sale to defraud the bailment-lessor of the goods. The Mount Holly case is more nearly in point. The court there held that the Bankruptcy Act invalidated the lien of a landlord who had distrained excessively. The finding of excessive distraint in Mount Holly stemmed from the particular facts involved. While recognizing the validity of accelerating future rent upon default of the tenant, 110 F.2d at page 223, the court found that there bad been no acceleration, id. at page 224. Moreover, the landlord's actions after bankruptcy were deemed inconsistent with a claim for accelerated future rent. Ibid. In the instant case no facts surrounding the distraint are given. As Textile quite correctly points out in its brief, there has been no finding by the Referee concerning acceleration. Frankly, it is uncertain whether this point was raised before the Referee. Textile maintains that the discrepancy between the amount claimed in the notice of distraint and that allowed as a lien in bankruptcy compels a finding of excessive distraint. But this is indicative of nothing; because the claim of a landlord who properly accelerated prior to bankruptcy would nonetheless be limited in bankruptcy by § 67, sub. c(1), 11 U.S.C.A. § 107, sub. c. (1), to the amount due for actual use and occupancy as provided in § 64, sub. a(5), 11 U.S.C.A. § 104, sub. a(5). In view of this it is impossible to conclude that the distraint was excessive. Since Textile advocates such a conclusion it was incumbent upon it to adduce factual data in support. On this ground alone the Court would be justified in rejecting the argument.

 Assuming for the moment that the distraint was excessive, Textile's contention must nevertheless fail. In the Mount Holly case the court reasoned that since the lien was not invalidated under other provisions of the Act, it was protected by what was then § 67, sub. d:

 'Liens given or accepted in good faith and not in contemplation of or in fraud upon this Act, and for a present consideration, which have been recorded according to law, if record thereof was necessary * * * to impart notice, shall, to the extent of such present consideration only, not be affected by this Act.' Act of June 25, 1910, ch. 412, 12, 36 Stat. § 842.

 Noting that this section required 'good faith', the court found that the excessive distraint constituted a knowing breach of the landlord's duty not to distrain excessively, and therefore negated the existence of 'good faith'. Hence, § 67, sub. d invalidated the lien.

 The use of § 67, sub. d to affirmatively invalidate a lien otherwise valid appears questionable. See 4 Collier, Bankruptcy P67.20, at 179-80 & n. 5 (14th ed. Moore & Oglebay 1942). However, the provision, as such, has now been eliminated from the Act. The report of the House Committee accompanying the bill that excised § 67, sub. d questioned its adequacy, and stated that its content had been provided for in §§ 60, sub. b, 67, subs. a (3), d, and 70, sub. e, 11 U.S.C.A. §§ 96, sub. b. 107, subs. a(3), d, 110, sub. e dealing with preferential and fraudulent transfers. H.R.Rep. No. 1409, 75th Cong., 1st Sess. 32 (1937). See also, S.Rep. No. 1916, 75th Cong., 3d Sess. 17 (1938). Therefore, it would seem that invalidation of the landlord's lien under the present statute must rest upon a specific section thereof, particularly those mentioned above. *fn1" It does not appear, and Textile does not contend, that any provision in the statute is adequate for this purpose. Indeed, § 67, sub. b, 11 U.S.C.A. § 107, sub. b, specifically validates the lien. This failure on the part of Textile to take cognizance of the impact of the revision of the statute upon the Mount Holly case is fatal to its attempt to strike down the lien.

 Textile next suggests that under Pennsylvania law its security interest is a lien superior to the landlord's. Absent the Uniform Commercial Code, such a position would be clearly untenable. It is provided by statute in Pennsylvania that on a sale following a distraint for rent, the claim of the landlord '* * * shall be a lien on the proceeds * * * and be paid first out of the proceeds of such sale.' Pa.Stat.Ann. Tit. 68, § 322 (Purdon Supp. 1958). A literal reading of this language indicates that landlord would prevail; and the cases have so held. See, e.g., In re Quaker City Unifrom Co., supra, 238 F.2d at page 157; Reinhart v. Gerhardt, 1943, 152 Pa.Super. 229, 31 A.2d 737; Herman v. Osgood, Pa.C.P.1955, 103 Pitt.L.J. 231. Textile advances the ...


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