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IN RE UNI-LAB

December 30, 1959

In the Matter of UNI-LAB, INC., Bankrupt


The opinion of the court was delivered by: WILLSON

This matter is before the Court on the petition for review of York and Foster, Inc., a landlord, which complains of the orders made by the Referee relating to the amount and order of distribution of the funds of the bankrupt. The proceedings are pursuant to 11 U.S.C.A. ยง 67.

The certificate of the Referee, prepared in accordance with sub-section a(8), states that the following two questions are presented:

 'A. Whether the order of the referee dated July 10, 1959, allowing priority to the landlord's claim for rent in the sum of $ 2,674.34 as stipulated by the parties, but allowing light and power charges of $ 1,408.76 and water rent of $ 74.58 as general claims only, and not part of the priority claim, is correct.

 B. Whether the order of the Referee dated July 17, 1959, holding claims of secured creditors attached to proceeds of sale of the goods subject to their security interests and should be paid ahead of the landlord's priority rent claim; that said rent claim is not a prior lien thereon, is correct.

 The facts from which these questions arise can be briefly stated as follows: Uni-Lab, Inc., the bankrupt, is a Pennsylvania Corporation, having its principal place of business in this district, in Union City, Erie County, Pennsylvania. On September 1, 1955, the bankrupt executed a written lease for the term of five years with York and Foster, Inc., (hereinafter called landlord) whereby the bankrupt leased a portion of a building located at 55 Fourth Avenue, Union City, Pennsylvania. By the terms of the lease, the lessee was to pay a monthly rental and in addition and by virtue of another clause, was required to 'pay for light, power, water and other facility charges used by the lessee.' An attached rider which was incorporated by reference, specifically provided for the exercise of the landlord's right of distraint for rent in enumerated circumstances. It was the original understanding between the parties that a separate light and power meter be installed for the lessee, whereby it could pay its own power bills, but as there were two other tenants in the building and the landlord did not desire to have three meters installed, an arrangement was entered into by the tenants and the landlord whereby the utility bills covering the building would be paid monthly by Erie Wood Products, one of the tenants. Thereafter, each of the three tenants was required to pay his pro-rata share of this bill, according to a detailed schedule of charges. Subsequent financial difficulties ensued for the lessee, Uni-Lab, Inc., and after a proposed arrangement by the debtor was withdrawn, Uni-Lab, Inc. was adjudged a bankrupt on February 10, 1959. It nowhere appears in the findings of fact contained in the orders filed by the Referee on July 10, 1959 and July 17, 1959, nor in the stipulation entered into by the landlord and the trustee, as to whether the landlord had issued a warrant of distraint for the delinquent rent prior to the institution of proceedings under the Bankruptcy Act. Although there is no such specific finding, it is uncontroverted that, in fact, there was no distraint by the landlord prior to bankruptcy.

 Under the facts of this case, the landlord can be accorded preferential treatment he seeks only if he is within the provisions of Section 67, sub. b of the Act. *fn1" The question thus boils down to whether the unpaid landlord whose claim is unaccompanied by a distraint, is entitled to a preference within the meaning of Section 67, sub. b. The landlord contends that the Referee erred in concluding that the rental charges incurred prior to bankruptcy were not entitled to a preference and in effect, he maintains that he is a secured creditor within the meaning of Section 67, sub. b, and that his status as such is unimpaired by any of the provisions of the Bankruptcy Act, and specifically, Section 67, subs. a and b. To understand his contentions, it is helpful to have in mind the general underlying policy of the Act and the several sections therein involved which are designed to implement this policy.

 The general underlying theory of the Act is the equality of distribution of the funds of the debtor. Sampsell v. Imperial Paper Corp., 313 U,.s. 215, 61 S. Ct. 904, 85 L. Ed. 1293. In this connection, in order to create as large a fund as possible for distribution, the statute contains several provisions which are designed to invalidate certain transactions that have occurred prior to bankruptcy which have the effect of depleting this available fund. *fn2" Yet it must be borne in mind that pre-bankruptcy liens which are valid and subsisting according to the general applicable law are unimpaired by bankruptcy unless forbidden by these specific provisions of the Act. This principal has been consistently recognized by the Supreme Court. City of Richmond v. Bird, 249 U.S. 174, 39 S. Ct. 186, 63 L. Ed. 543; Goggin v. Division of Labor Law Enforcement of California, 336 U.S. 118, 69 S. Ct. 469, 93 L. Ed. 543. Here we are specifically concerned with a proper application of Section 64, sub. a(5) and Section 67, sub. b. As it has been noted above, Section 67, sub. a implements the policy of creating as large a fund as possible for the general creditors by providing that liens obtained within four months of bankruptcy are invalid if --

 (a) The bankrupt was insolvent when the lien was obtained;

 (b) The lien was fraudulently sought and permitted.

 Subdivision b of Section 67 protects the liens enumerated therein from the provisions of subdivision a by stating:

 '(b) The provisions of section 60 of this act to the contrary notwithstanding, statutory liens in favor of employees, contractors, mechanics, landlords, or other classes of persons and statutory liens for taxes and debts owing to the United States or to any State or any subdivision thereof, created or recognized by the laws of the United States or of any State, may be valid against the trustee, even though arising or perfected while the debtor is insolvent and within four months prior to the filing of the petition initiating a proceeding under this title by or against him.

 At this juncture, it is helpful to bear in mind the nature of the landlord's interest with regard to the unpaid rent where there has been no distraint. The common law rule still obtains in Pennsylvania and under this rule the lien of the landlord arises when a levy has been made under distraint proceedings. Shalet v. Klauder, 3 Cir., 34 F.2d 594; Hay v. Patrick, 3 Cir., 79 F.2d 407. After distraint under a landlord's warrant, a lien arises within the meaning of Section 67, sub. b. *fn3" Prior to the levy, the landlord has no lien but it might be said that the landlord's right to distraint on goods for rent is a right in the nature of a lien rather than a lien itself. Certain statutory modifications have been made relating to the common law rule of distraint but are not here relevant. *fn4"

 In this case there has been no distraint, so under the law of Pennsylvania the landlord has no valid lien. The question thus presented is whether the unpaid landlord whose claim is unaccompanied by distraint is entitled to a preference within the meaning of Section 67, sub. b. This Court concludes that he is not. For the purpose of this section, the mere right to distraint is not sufficient nor equivalent to a lien obtained by distraint. The statute is clear, unambiguous and explicit, and plainly states that what is being excluded from the effect of Section 67, sub. a is 'statutory liens'. To conform to the spirit and purpose of the Act it is necessary that this term be given a strict construction. The statute expressly refers to 'liens' and no authority or valid reason has been advanced why this term should be expanded to include the unexercised right to obtain a lien. The conclusion must be that the landlord's claim does not fall within the provisions of Section 67, sub. b, and hence he is not entitled to the preferential treatment he here seeks.

 The landlord relies, in support of his contentions, on three cases, the first from which he quotes is In re Mount Holly Paper Co., 3 Cir., 1940, 110 F.2d 220. This case is easily distinguishable because it was decided under sections of the Bankruptcy Act which are no longer enforced. *fn5" The second case upon which the landlord places reliance is In re Quaker City Uniform Co., 3 Cir., 1956, 238 F.2d 155. This case held that the postponement of a landlord's lien, which was superior under the Pennsylvania law to the lien of a chattel mortgagee, by necessary implication postponed the lien of the chattel mortgagee to a position behind the subordinated lien of a landlord who had distraint. This case is distinguishable, as is the Einhorn case, the third case upon which the ...


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