or distribution of the bankrupt's assets.' (Emphasis supplied.)
Allowance of claims such as petitioner's will not 'develop, preserve or distribute this estate' but in cases such as this would decimate it with $ 3,500,000. of claims. The undersigned agrees that the repairing of these pipes in the Fretz Building is an activity related to the preservation of the bankrupt's assets and the cost of such activity would be an expense of administration. However, damage caused by any fire resulting from the negligent manner in which this activity was carried on can hardly be considered an expense related to the preservation of the bankrupt's assets. Specific language should be secured from Congress to accomplish the result sought by the Reading Company, just as Congress acted in 1962 to cover specifically the claims disallowed in Guerin v. Weil, Gotshal & Manges, supra, 205 F.2d at 305.
The Supreme Court, in discussing the subordination by § 67, sub. c of certain secured liens to the claims under § 64, sub. a(1) and (2), stated in Goggin v. Division of Labor Law Enforcement of Cal., 336 U.S. 118, at 127, 69 S. Ct. 469, at 474, 93 L. Ed. 543 (1949):
'The background of § 67, sub. c suggests a conscious purpose to give a narrowly limited priority to administrative expenses and to certain wage claims * * *.'
The Supreme Court based the above statement on a part of the legislative history of § 67, sub. c indicating that such 'narrowly limited priority' was necessary to secure effective administration of the bankruptcy law. This part of the legislative history relevant to the case at bar quoted by the Supreme Court is (see footnote 8, p. 128, 69 S. Ct. p. 474):
"It is significant that in recent years state legislatures have been enacting special legislation in favor of tax claims, public debts, and a variety of private claims. Statistics in the bankruptcy cases show that the effective administration of the bankruptcy law has seriously suffered therefrom. Such claims * * * consume the entire estate, leaving nothing for the payment of the costs and expenses of administration incurred in reducing the assets to cash. * * *
"There is therefore need for a provision to protect the administration costs and expenses; * * *.' (From and explanatory note attributed to Jacob I. Weinstein in a Committee Report Analysis of H.R. 12889, 74th Cong., 2d Sess. (1936), cited at 336 U.S. 127-129, 69 S. Ct. 469.)
Thus, administration costs and expenses are those which promote effective administration of the bankruptcy law. Petitioner's claim is not such a cost or expense.
3. The decided cases indicate a holding that this claim does not fall within the scope of § 64, sub. a(1).
There are no cases which have directly considered the issue raised by the facts on this record. However, there are two Circuit Court of Appeals cases which indicate that a tort claim is not an administrative expense within § 64, sub. a(1). In Re Hudson, supra,
held that tort claims which arose after the filing of a petition were not entitled to a priority as an administrative expense where the proceeding was a Chapter X reorganization. The claimants argued that the bankrupt qualified as a railroad corporation and that they, therefore, fell within § 77, sub. n of the Bankruptcy Act. Although § 64, sub. a(1) was not discussed, the court implicitly held that tort claims were not entitled to a priority under that section when it held that the bankrupt was not a railroad corporation and that the claimants were consequently not entitled to priority as an operating expense. In re Connecticut Motor Lines, Inc., supra, is indicative of the narrow view that the Court of Appeals for the Third Circuit has taken of the scope of § 64, sub. a(1). Although this case was not concerned with the issue of whether or not tort claimants were entitled to a priority under this section, its holding did limit this section to only those port-bankruptcy expenses which are related to development, preservation or distribution of the bankrupt's estate. As discussed above, the undersigned is of the opinion that the instant petitioner's claim is not such an expense.
B. The Referee correctly expunged the Reading Company's claim from the record.
Since the Reading Company's claim does not qualify as an administration expense, the Referee was correct in expunging it from the record, as it was not provable as an unsecured claim under § 63 of the Bankruptcy Act, 11 U.S.C. § 103. 'In order to be entitled to a pro rata share in the estate, a claim must have been allowed, and allowance depends first of all upon due and timely proof and filing.' 3 Collier on Bankruptcy, 14th Ed., § 63.05, at p. 1780. Section 63, entitled 'Debts Which May Be Proved,' states that negligence actions must be instituted prior to and be pending at the time of filing the petition in bankruptcy in order to be provable. The date of the filing of the petition in bankruptcy is considered to be November 16, 1962, the date of the filing of the petition under Chapter XI, § 378, of the Bankruptcy Act, 11 U.S.C. § 778. Since the fire occurred on January 1, 1963, all actions and claims for the alleged negligence have been filed subsequent to the filing of the petition in bankruptcy. Thus, any claim of the Reading Company arising out of this fire is not provable as an unsecured claim under § 63 of the Act and, therefore, not entitled to a pro rata share of the estate.
The Referee properly expunged the ord.
The able briefs of the parties have been filed as Documents 9-12. Comments on several cases relied on by the Reading Company are contained in Appendix A.
And now, June 9, 1965, it is ordered that the Petition for Review of the Reading Company, certified by the referee's certificate for review dated October 9, 1964, is denied and that the Order of the Referee dated September 30, 1964, is affirmed.
TO MEMORANDUM OPINION AND ORDER OF JUNE 1965 IN In the Matter of I. J. KNIGHT REALTY CORPORATION, CAUSE NO 27540 in BANKRUPTCY
Petitioner first asserts that all the text writers agree that tort damage claims are allowable as administrative expenses. After this assertion, petitioner quotes from four different sources which generally state that damages from torts arising during the period that a business is being operated by a receiver are considered a part of the operating expense of the receivership. However, the statements of these writers, when taken in context, are concerned with the broad range of receiverships in general and none of the cases cited as authority by the writers for the quoted statements are at all similar to the case at bar.
The cases relied on deal mainly with railroad receiverships or state receiverships, and none of them discusses the allowance of tort damages during bankruptcy as priority claims under § 64, sub. a(1). Of the several cases cited by the petitioner, only two of them discuss the interpretation of 'costs and expenses of administration' as that phrase is used in § 64, sub. a(1): In re Progress Lektro Shave Corp., 35 F.Supp. 915(D.Conn.1940); and In re Connecticut Motor Lines, Inc., 336 F.2d 96 (3rd Cir. 1964). Neither of these cases is concerned with the issue of whether tort damages suffered during the period of operation of a business by a Receiver or Trustee are administrative expenses. Other cases cited do concern themselves with whether such claims are administrative expenses, but do not discuss whether or not such are allowable under the section in question.
Cases Where Estate Profited From Tort Claim
In In re Progress Lektro Corp., supra, relied on by the petitioner, the facts are distinguishable from the instant case as there a trustee sold for the benefit of the estate an article covered by the claimant's patent, thus depriving the patentee of his exclusive right of sale. The court found this to be a violation of the patent laws and it held the plenary powers of Congress in the field of bankruptcy to be subject to the guarantees of the patent laws. In other words, the money received by the estate for the sale of this patented article in reality belonged to the patentee and to have denied him a priority would have been to deny him the right to his own property. In the case at bar, there has been no appropriation to the benefit of the estate of the petitioner.
Bereth v. Sparks, 51 F.2d 441, 80 A.L.R. 909 (7th Cir. 1931), is similarly distinguishable. This § case is concerned with a bank receivership and not with § 64, sub. a(1), but will be discussed for purposes of relevancy as to what constitutes 'costs and expenses of administration.' In Berth, the claim arose out of a bank's unlawful attachment of the claimant's personal property. Subsequent to such attachment, the bank was placed in receivership. The claimant sued the receiver in a replevin action and recovered possession of the property. If that claim had been denied a priority, as in the Lektro Corp. case, supra, the claimant would have been denied access to his own property.
In another case relied on by petitioner, In re Hunter, 151 F. 904 (E.D.Pa.1907), the court allowed a claim for loss of rent where a trustee, just prior to the § sale of the bankrupt's property, intentionally refused to remove the bankrupt's property for the purpose of avoiding the removal expense. The court stated that this claim could not be proved under § 63, but did not state why the claim was being allowed. The court held that the trustee was personally liable on the landlord's claim, but that the estate was liable over to the trustee, 'the estate having profited by the trespass.' Thus, this case is not authority for the proposition that tort damages arising during receivership are costs of administration because such is not discussed in the case and, even if the damages recovered were allowed as costs of administration, it would have been on the theory that these damages were accrued as 'a cost of preserving the estate.' If recovery is allowed in the instant case, it cannot be on the theory that the damages were intentionally accrued in order to preserve the estate.
Other Cases Relied On By Petitioner
Petitioner places heavy reliance on a statement by Judge Learned Hand in Vass v. Conron, 59 F.2d 969, at 971 (2nd Cir. 1932).
In that case, a state court action against a receiver and trustee was enjoined as being in an improper forum. The undersigned agrees with the Referee that the statement relied on by petitioner was dictum and rejects the petitioner's contention that Judge Hand could not constitutionally enjoin the action in the state court without discussing what comprises an administrative expense.
Two other cases cited by the petitioner in support of its contention that its tort claim should be accorded priority are Cowdrey v. Galveston, etc. R.R. Co., 93 U.S. 352, 23 L. Ed. 950 (1876), and Farmers' Loan and Trust Co. v. Northern Pac. R. Co., 74 F. 431 (D.Ore.1896). Both of these are cases involving railroads in receivership. Once again, neither involves the question of interpreting § 64, sub. a(1), but both are cited for their relevance to the determination of administration expenses during receiverships in general. In many old cases railroads in receivership allowed negligence claims as administrative expenses. However, as discussed in the foregoing opinion (part A-2(a)), the enactment of § 77 of the Bankruptcy Act in 1933 was a recognition by Congress of the peculiar problems entailed in the reorganization of railroads engaged in interstate commerce.