Reading Company v. Brown

A realty corporation filed a petition for arrangement under Chapter XI of the Bankruptcy Act. The District Court appointed respondent Brown as receiver and authorized him to operate the debtor's business, which consisted principally of leasing an industrial building, the debtor's only significant asset. Fire destroyed the building and spread to and destroyed the property of petitioner and others. Petitioner filed a claim for "administrative expenses" of the arrangement based on the receiver's asserted negligence and others filed 146 additional similar claims. Thereafter the realty company was voluntarily adjudicated a bankrupt and petitioner's and the others' claims thus became claims for administration expenses in bankruptcy. Under § 64a (1) of the Bankruptcy Act "the costs and expenses of administration, including the actual and necessary costs and expenses of preserving the estate," are given first priority, and it is agreed that that provision applies to administration expenses of Chapter XI arrangements. Brown, who had been elected trustee, moved to expunge the claims as not being expenses of administration. It was agreed (1) that the decision as to whether petitioner's claim was thus provable would apply to the other 146 claims and (2) that, for purposes of deciding whether the claim is provable, the damage to petitioner's property resulted from the negligence of the receiver and a workman he employed. The District Court upheld the referee's disallowance of the claim, and the Court of Appeals affirmed. The United States, the holder of a tax claim, which had entered the case on the side of the trustee, urges as a respondent that tort claims during an arrangement, if properly preserved, are provable only as general claims in any subsequent bankruptcy, under § 63a of the Act, which provides that "[d]ebts of the bankrupt may be proved and allowed against his estate which are founded upon... (7) the right to recover damages in any action for negligence instituted prior to and pending at the time of the filing of the petition in bankruptcy...."

Held: Damages resulting from the negligence of a receiver acting within the scope of his authority as receiver give rise to "actual and necessary" costs of operating the debtor's business under a Chapter XI arrangement and are thus entitled to the priority status accorded to costs of administration by by § 64a (1) of the Bankruptcy Act. Pp. 476-485.


 * (a) The trustee's contention that first priority as "necessary" expenses should be given only to those expenditures which are necessary to encourage third parties to deal with an insolvent business overlooks the statutory objective of fairness to all claimants against an insolvent. P. 477.


 * (b) Petitioner, which in principle concededly has a right to recover against the "employer" (the business under arrangement) of the receiver and workman who inflicted the injury, under the rule of respondeat superior, did not merely suffer injury at the hands of an insolvent business: it had an insolvent business thrust upon it by operation of law. Pp. 477-478.


 * (c) It would not comport with the principle of respondeat superior or the rule of fairness in bankruptcy to seek the objectives of a Chapter XI arrangement at the cost of excluding the arrangement's tort creditors or totally subordinating their claims to those for whose benefit the arrangement is instituted. P. 479.


 * (d) A tort claim arising during an arrangement, like a tort claim arising during a bankruptcy proceeding proper, is not provable as a general claim in bankruptcy under § 63. To establish a claim under that provision suit must be filed before the filing of the petition in bankruptcy and when the section is applied to an arrangement, the date of the filing of the petition in bankruptcy is deemed to be the date of the filing of the arrangement petition; and in any event a claim under § 63a must be a claim against the debtor, not against the estate, in a Chapter XI arrangement. Pp. 479-483.


 * (e) The costs of insurance against tort claims arising during an arrangement are administration expenses payable in full under § 64a (1), and if a receiver or debtor in possession is to be encouraged to obtain adequate insurance, the claims against which the insurance is obtained should be potentially payable in full. P. 483.


 * (f) The long-established rule of equity receiverships, that torts of the receivership create claims against the receivership itself, provides an analogy to the situation here. Pp. 483-484.

370 F. 2d 624, reversed and remanded.

Thomas Raeburn White, Jr., argued the cause for petitioner. With him on the briefs was H. Merle Mulloy.

Owen B. Rhoads argued the cause for respondent Brown. With him on the brief were Samuel Marx and Arthur E. Newbold III.

Richard M. Roberts argued the cause for the United States. On the brief were Solicitor General Griswold, Assistant Attorney General Rogovin, Harris Weinstein, Crombie J. D. Garrett, and Edward Lee Rogers.