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IN RE I. J. KNIGHT REALTY CORP.

June 9, 1965

In the Matter of I. J. KNIGHT REALTY CORPORATION, Bankrupt


The opinion of the court was delivered by: DUSEN

This case is before the court upon the petition of the Reading Company to review an order of the Referee in Bankruptcy, expunging a claim filed by the Reading Company asking for damages allegedly caused by the negligence of the Receiver in carrying on the business of the bankrupt (pp. 34 and 35 of Document 8). Petitioner seeks to have its claim, based on losses suffered in a fire which started on the bankrupt's property, allowed as a priority claim for administrative expenses under § 64, sub. a (1) of the Bankruptcy Act, 11 U.S.C. § 104. Petitioner is but one of over a hundred claimants who have filed proofs, but it has been agreed that the instant case is a test case which will decide the right of all claimants to prove their claims as administrative expenses.

The CASE STATED, as filed with the Referee and signed by counsel for the Trustee and counsel for the claimant, is as follows:

 'On November 16, 1962, I. J. Knight Realty Corp. (hereafter Knight Realty) filed a petition for an arrangement under Chapter XI of the Bankruptcy Act. On the same day, Judge Van Dusen appointed Francis Shunk Brown, 3rd, Esquire, as receiver and authorized him to operate the business of Knight Realty.

 'The only significant asset of Knight Realty was an eight-story industrial structure known as the Fretz Building, located at 10th & Diamond Streets, Philadelphia, Pennsylvania. The business of Knight Realty consisted of leasing space in the Fretz Building and operating the building for the benefit of its tenants.

 'On January 1, 1963, the Fretz Building was totally destroyed by a fire of unusual intensity. The conflagration spread to adjoining premises, damaging or destroying real and personal property of the Reading Company and others.

 'On April 3, 1963, the Reading Company filed a claim for $ 559,730.83 which it styled as a claim 'for administrative expenses due to the negligence of the Receiver' in operating the business of Knight Realty. In essence, the Reading Company's claim alleges that the receiver, Francis Shunk Brown, 3rd, was negligent in permitting the fire to start and 'spread beyond its normal confines.' Thereafter, other fire loss claimants filed 146 additional claims for administration expenses based on the alleged negligence of the receiver in operating the business of Knight Realty. The total of all such claims exceeds $ 3,500,000. All of the well pleaded allegations of fact in the Reading Company's Statement of Claim are to be deemed true for the purposes of the Trustee's Motion to Dismiss or Expunge the Claim of the Reading Co. *fn1"

 'On May 14, 1963, Knight Realty was adjudicated a bankrupt pursuant to a voluntary consent to adjudication filed on its behalf. Francis Shunk Brown, 3rd, was subsequently elected Trustee in Bankruptcy of Knight Realty.

 'The Trustee, Mr. Brown, has petitioned this Court to expunge the Reading Company's claim on the ground that it is not an administration expense within the meaning of the Bankruptcy Act. This Court's ruling on the Reading Company's claim for administration expenses will establish the law of case with respect to all other claims for administration expenses based on the alleged negligence of the receiver.

 'Other claims filed in this matter consist of federal tax claims of $ 244,953.91, and other tax claims of $ 70,823.19. Various other claims are as follows: secured, $ 230,619.04; unsecured, $ 76,905.47; and wages, $ 860.00. The Trustee, according to present estimates, will have between $ 630,000 and about $ 845,000 depending on the outcome of certain litigation against fire insurance companies presently pending.'

 There are two questions presented by the facts of the case at bar:

 (A) The principal question is whether the Reading Company's claim comes within 'the costs and expenses of administration' of § 64, sub. a(1) of the Bankruptcy Act.

 (B) If the answer to (A) is in the negative, does the Reading, company still have a 'provable' claim so that the Referee should not have expunged it.

 A. 'Costs and expenses of administration' ( § 64, sub. a(1) of the Bankruptcy Act, as amended -- 11 U.S.C. § 104, sub. a(1)).

 The claim of the Reading Company does not fall within the above-quoted language of § 64, sub. a(1) of the Bankruptcy Act, as amended to December 1962, for these reasons:

 1. The claim does not fall within the language of the Act, strictly construed

 Section 64 of the Bankruptcy Act, a amended in 1962, provides in ...


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