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In re I. J. Knight Realty Corp.

decided: January 6, 1967.

IN THE MATTER OF I. J. KNIGHT REALTY CORP., BANKRUPT. READING COMPANY, APPELLANT


Reargued December 8, 1966.

Staley, Chief Judge and McLaughlin, Kalodner, Hastie, Smith, Freedman and Seitz, Circuit Judges.

Author: Kalodner

Opinion OF THE COURT

KALODNER, Circuit Judge.

The issue presented on this appeal is whether appellant's claim, if proved, is entitled to the priority status accorded to costs of administration by Section 64, sub. a(1) of the Bankruptcy Act.*fn1

The facts are not in dispute, and have been stipulated. In substance, they are as follows:

On November 16, 1962, I. J. Knight Realty Corp. filed a petition for arrangement under Chapter XI of the Bankruptcy Act. On the same day, the District Court appointed a Receiver and authorized him to operate the debtor's business, which consisted principally in the leasing of the debtor's eight-story industrial building in Philadelphia. On January 1, 1963, this building was destroyed by a fire which spread to adjoining premises and caused damage to real and personal property of The Reading Company, appellant herein, and of others.

On April 3, 1963, appellant filed a claim for damages in the amount of $559,730.83, alleging that the receiver was negligent in permitting the fire to start and "to spread far beyond its normal confines." The claim specifically recited that it was "for administrative expenses due to the negligence of the Receiver in operation of business of the debtor." Other claimants have filed 146 additional claims, similarly grounded and similarly seeking priority status as administration expenses, totalling in excess of $3,500,000. Those claims are held in abeyance by the Referee pending the ultimate disposition of the claim now on appeal.

On May 14, 1963, the debtor was voluntarily adjudicated a bankrupt. A Trustee was elected, and he moved to expunge appellant's claim on the ground that it was not an administration expense under Section 64, sub. a(1) of the Bankruptcy Act.*fn2 The Referee expunged the claim. On petition for review, the District Court concluded that the claim was not entitled to priority as an administration expense under Section 64, sub. a(1).*fn3 242 F. Supp. 337 (E.D.Pa.1965).

We are of the opinion that the Order of the District Court should be affirmed.

The right of a claim to priority status in a Chapter XI proceeding is controlled exclusively by Section 64 of the Bankruptcy Act by virtue of the provisions of Section 302 of the Act.*fn4 In the matter of Chicago Express, Incorporated, 332 F.2d 276, 278 (2 Cir. 1964), cert. den. 379 U.S. 879, 85 S. Ct. 146, 13 L. Ed. 2d 86; American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2 Cir. 1960). Manifestly, the right to priority depends upon the ability of the appellant to bring its claim within the language of the preferential classification sought. Goldie v. Cox, 130 F.2d 690 (8 Cir. 1942).

We recently expressly ruled that expenses which "are unrelated to development, preservation or distribution of the bankrupt's assets" cannot be considered "costs and expenses of administration" within the meaning of Section 64 sub. a(1) as amended in 1962. In the Matter of Connecticut Motor Lines, Inc., 3 Cir., 336 F.2d 96 (1964).

We there said at pages 101-102:

"Our view of the boundaries of Section 64, sub. a(1) of the Bankruptcy Act is reinforced by the latest amendment to that Section in 1962. Prior to the 1962 amendment, Section 64, sub. a(1) set forth a number of individual first priority expense items under no explicit generic label. 'Costs and expenses of administration' was one of a number of particular items enumerated in Section 64, sub. a(1). In such a posture, the Section ...


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