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. .
Page 391 U. S. 472
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 § 64a(1) of the Bankruptcy Act. Pp. 391 U. S.
(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. 391 U. S.
(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. 391 U. S.
(c) It would not comport with the principle of respondeat
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.
391 U. S.
(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. 391 U. S.
(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.
391 U. S.
(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. 391 U. S.
370 F.2d 624, reversed and remanded.
Page 391 U. S. 473
MR. JUSTICE HARLAN delivered the opinion of the Court.
On November 16, 1962, I. J. Knight Realty Corporation filed a
petition for an arrangement under Chapter XI of the Bankruptcy Act,
11 U.S.C. §§ 701-799. The same day, the District Court appointed a
receiver, Francis Shunk Brown, a respondent here. The receiver was
authorized to conduct the debtor's business, which consisted
principally of leasing the debtor's only significant asset, an
eight-story industrial structure located in Philadelphia.
On January 1, 1963, the building was totally destroyed by a fire
which spread to adjoining premises and destroyed real and personal
property of petitioner Reading Company and others. On April 3,
1963, petitioner filed a claim for $559,730.83 in the arrangement,
based on the asserted negligence of the receiver. It was styled a
claim for "administrative expenses" of the arrangement. Other fire
loss claimants filed 146 additional claims of a similar nature. The
total of all such claims was in excess of $3,500,000, substantially
more than the total assets of the debtor.
On May 14, 1963, Knight Realty was voluntarily adjudicated a
bankrupt, and respondent receiver was subsequently elected trustee
in bankruptcy. The claims of petitioner and others thus became
claims for administration
Page 391 U. S. 474
expenses in bankruptcy, which are given first priority under §
64a(1) of the Bankruptcy Act, 11 U.S.C. § 104(a)(1). [Footnote 1
] The trustee moved to expunge the
claims on the ground that they were not for expenses of
administration. It was agreed that the decision whether
petitioner's claim is provable as an expense of administration
would establish the status of the other 146 claims. It was further
agreed that, for purposes of deciding whether the claim is
provable, it would be assumed that the damage to petitioner's
property resulted from the negligence of the receiver and a workman
he employed. [Footnote 2
United States, holding a claim for unpaid prearrangement taxes
admittedly superior to the claims of general creditors and inferior
to claims for administration expenses, entered the case on the side
of the trustee.
The referee disallowed the claim for administration expenses. He
also ruled that petitioner's claim was not provable as a general
claim against the estate, a ruling challenged by neither side.
] On petition for
Page 391 U. S. 475
referee was upheld by the District Court. On appeal, the Court
of Appeals for the Third Circuit, sitting en banc, affirmed the
decision of the District Court by a 4-3 vote. We granted
certiorari, 389 U.S. 895, because the issue is important in the
administration of the bankruptcy laws and is one of first
impression in this Court. For reasons to follow, we reverse.
Section 64a of the Bankruptcy Act provides in part as
"The debts to have priority, in advance of the payment of
dividends to creditors, and to be paid in full out of bankrupt
estates, and the order of payment, shall be (1) the costs and
expenses of administration, including the actual and necessary
costs and expenses of preserving the estate subsequent to filing
the petition. . . ."
It is agreed that this section, applicable, by its terms, to
straight bankruptcies, governs payment of administration expenses
of Chapter XI arrangements. Furthermore, it is agreed that, for the
purpose of applying this section to arrangements, the words
"subsequent to filing the petition" refer to the period subsequent
to the arrangement petition, [Footnote 4
] and the words "preserving the estate" include
the larger objective, common to arrangements, of operating the
debtor's business with a view to rehabilitating it. [Footnote 5
Page 391 U. S. 476
The question in this case is whether the negligence of a
receiver administering an estate under a Chapter XI arrangement
gives rise to an "actual and necessary" cost of operating the
debtor's business. The Act does not define "actual and necessary,"
nor has any case directly in point been brought to our attention.
] We must,
therefore, look to the general purposes of § 64a, Chapter XI, and
the Bankruptcy Act as a whole.
The trustee contends that the relevant statutory objectives are
(1) to facilitate rehabilitation of insolvent businesses and (2) to
preserve a maximum of assets for
Page 391 U. S. 477
distribution among the general creditors should the arrangement
fail. He therefore argues that first priority as "necessary"
expenses should be given only to those expenditures without which
the insolvent business could not be carried on. For example, the
trustee would allow first priority to contracts entered into by the
receiver because suppliers, employees, landlords, and the like
would not enter into dealings with a debtor in possession or a
receiver of an insolvent business unless priority is allowed. The
trustee would exclude all negligence claims, on the theory that
first priority for them is not necessary to encourage third parties
to deal with an insolvent business, that first priority would
reduce the amount available for the general creditors, and that
first priority would discourage general creditors from accepting
In our view, the trustee has overlooked one important, and here
decisive, statutory objective: fairness to all persons having
claims against an insolvent. Petitioner suffered grave financial
injury from what is here agreed to have been the negligence of the
receiver and a workman. It is conceded that, in principle,
petitioner has a right to recover for that injury from their
"employer," the business under arrangement, upon the rule of
] Respondents contend. however that
Page 391 U. S. 478
petitioner is in no different position from anyone else injured
by a person with scant assets: its right to recover exists in
theory but is not enforceable in practice.
That, however, is not an adequate description of petitioner's
position. At the moment when an arrangement is sought, the debtor
is insolvent. Its existing creditors hope that, by partial or
complete postponement of their claims they will through successful
rehabilitation, eventually recover from the debtor either in full
or in larger proportion than they would in immediate bankruptcy.
Hence, the present petitioner did not merely suffer injury at the
hands of an insolvent business: it had an insolvent business thrust
upon it by operation of law. That business will, in any event, be
unable to pay its fire debts in full. But the question is whether
the fire claimants should be subordinated to, should share equally
with, or should collect ahead of those creditors for whose benefit
the continued operation of the business (which unfortunately led to
a fire instead of the hoped-for rehabilitation) was allowed.
Page 391 U. S. 479
Recognizing that petitioner ought to have some means of
asserting its claim against the business whose operation resulted
in the fire, respondents have suggested various theories as
alternatives to "administration expense" treatment. None of these
has case support, and all seem to us unsatisfactory.
Several need not be pursued in detail. The trustee contends
that, if the present claims are not provable in bankruptcy, they
would survive as claims against the shell. He also suggests that
petitioner may be able to recover from the receiver personally, or
out of such bond as he posted. Without deciding whether these
possible avenues are indeed open, [Footnote 8
] we merely note that they do not serve the
present purpose. The "master," liable for the negligence of the
"servant" in this case was the business operating under a Chapter
XI arrangement for the benefit of creditors and with the hope of
rehabilitation. That benefit and that rehabilitation are worthy
objectives. But it would be inconsistent both with the principle of
and with the rule of fairness in
bankruptcy to seek these objectives at the cost of excluding tort
creditors of the arrangement from its assets, or totally
subordinating the claims of those on whom the arrangement is
imposed to the claims of those for whose benefit it is
The United States, as a respondent, suggests instead that tort
claims arising during an arrangement are, if properly preserved,
provable general claims in any subsequent bankruptcy under § 63a of
the Act, 11 U.S.C. § 103(a). That section reads as follows:
"Debts 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
Page 391 U. S. 480
negligence instituted prior to and pending at the time of the
filing of the petition in bankruptcy. . . ."
It is agreed by all parties that this section will not avail the
present petitioner, who, it appears, did not file suit on its claim
prior to the bankruptcy proper. This, the United States argues, is
its own fault: it could have filed suit after the tort, during the
arrangement, and before the petition in bankruptcy, and thus
preserved its claim. This was not the view of the District Court.
Section 302 of the Act, the section which provides that Chapters I
to VII of the Act (including §§ 63 and 64) shall be applicable to
arrangements under Chapter XI as well as straight bankruptcies,
contains the following provision:
"For the purposes of such application the date of the filing of
the petition in bankruptcy shall be taken to be the date of the
filing of an original petition under section 722 of this title [§
322 of the Act, 11 U.S.C. § 722, which provides for filing original
petitions for arrangements]. . . ."
Section 378(2) of the Act, 11 U.S.C. § 778(2), dealing with
procedure when bankruptcy ensues upon an arrangement, provides
"in the case of a petition filed under section 722 of this
title, the proceeding shall be conducted, so far as possible, in
the same manner and with like effect as if a voluntary petition for
adjudication in bankruptcy had been filed and a decree of
adjudication had been entered on the day when the petition under
this chapter [i.e.,
the petition for an arrangement] was
filed. . . ."
The effect of these two sections is that, whether or not an
arrangement is superseded by bankruptcy, for purposes of applying §
63 to arrangements, the date of the arrangement petition is deemed
to be the date of a petition in bankruptcy.
Page 391 U. S. 481
From this fact, the District Court concluded, and petitioner now
argues, that a person negligently injured during the course of an
arrangement could never have a provable general claim under § 63a.
For that section requires that suit 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
In response, the United States notes that § 378(2) is qualified
by the words "so far as possible." The Government therefore
suggests a holding that it is not "possible" to treat the date of
the arrangement petition as the critical date in a case such as the
present, because that point in time antedates the tort. On that
theory, it is suggested that, for present purposes, § 63a's
reference to the date of filing the bankruptcy petition be taken to
refer to the date of the petition in bankruptcy proper.
We do not find this an acceptable alternative. The only thing
that renders it not "possible" to follow the statutory scheme and
meld the arrangement into the bankruptcy is the Government's
insistence that petitioner's claim must be held to have been
provable under § 63a if only petitioner had taken the proper steps.
There is nothing "impossible" about construing the sections here
involved to mean what they say: 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 the
There are additional reasons for reading the sections literally
in this case. In the first place, the United States' suggestion
will not work where bankruptcy does not ensue upon the arrangement,
for then there is no later date that can be used as the cut-off for
63a(7) claims. In that case, it would be necessary either to hold
that a tort claim arising during an arrangement is a provable
Page 391 U. S. 482
general claim if bankruptcy ensues but is not a provable general
claim in the arrangement itself, or to hold that there is no time
limit on filing suit so long as the arrangement remains an
arrangement. Nothing in the qualifying language of § 378(2) grants
permission to read the time limitation out of § 63a(7) of the
An even greater difficulty is presented by the fact that § 63a
refers to provable debts of the bankrupt, and distinguishes the
bankrupt from his estate. Section 302 provides that, in applying §
63a to arrangements, the word "bankrupts" shall be deemed to relate
also to "debtors." Thus, the natural reading of § 63a, when applied
to arrangements as if they were bankruptcies, is that, in order to
be provable under § 63a(7) a tort claim must be a claim against the
debtor and not against the estate in a Chapter XI arrangement.
Respondents might argue this question as they do the time
limitation: that it would be preferable to deem the words "debts of
the bankrupt" to mean "debts of the debtor or of his estate arising
up to the time of bankruptcy proper." This argument is open,
however, to the same objections as the argument on time
limitations: it is a strained reading of the statute which makes no
allowance for the occasions when straight bankruptcy does not
In any event, we see no reason to indulge in a strained
construction of the relevant provisions, for we are persuaded that
it is theoretically sounder, as well as linguistically more
comfortable, to treat tort claims arising during an arrangement as
actual and necessary expenses of the arrangement, rather than debts
of the bankrupt. In the first place, in considering whether those
injured by the operation of the business during an arrangement
should share equally with, or recover ahead of, those for whose
benefit the business is carried on, the latter seems more natural
and just. Existing creditors are, to
Page 391 U. S. 483
be sure, in a dilemma not of their own making, but there is no
obvious reason why they should be allowed to attempt to escape that
dilemma at the risk of imposing it on others equally innocent.
More directly in point is the possibility of insurance. An
arrangement may provide for suitable coverage, and the court below
recognized that the cost of insurance against tort claims arising
during an arrangement is an administrative expense payable in full
under § 64a(1) before dividends to general creditors. [Footnote 9
] It is, of course, obvious
that proper insurance premiums must be given priority, else
insurance could not be obtained, and if a receiver or debtor in
possession is to be encouraged to obtain insurance in adequate
amounts, the claims against which insurance is obtained should be
potentially payable in full. In the present case, it is argued, the
fire was of such incredible magnitude that adequate insurance
probably could not have been obtained and, in any event, would have
been foolish; this may be true, as it is also true that allowance
of a first priority to the fire claimants here will still only mean
recovery by them of a fraction of their damages. In the usual case
where damages are within insurable limits, however, the rule of
full recovery for torts is demonstrably sounder.
Although there appear to be no cases dealing with tort claims
arising during Chapter XI proceedings, decisions in analogous cases
suggest that "actual and necessary costs" should include costs
ordinarily incident to operation of a business, and not be limited
to costs without which rehabilitation would be impossible. It has
long been the rule of equity receiverships that torts of the
receivership create claims against the receivership itself;
] in those
cases, the statutory limitation to "actual
Page 391 U. S. 484
and necessary costs" is not involved, but the explicit
recognition extended to tort claims in those cases weighs heavily
in favor of considering them within the general category of costs
In some cases arising under Chapter XI, it has been recognized
that "actual and necessary costs" are not limited to those claims
which the business must be able to pay in full if it is to be able
to deal at all. For example, state and federal taxes accruing
during a receivership have been held to be actual and necessary
costs of an arrangement. [Footnote 11
] The United States, recognizing and
supporting these holdings, agrees with petitioner that costs that
form "an integral and essential element of the continuation of the
business" are necessary expenses even though priority is not
necessary to the continuation of the business. Thus, the Government
"an injury to a member of the public -- a business invitee --
who was injured while on the business premises during an
arrangement would present a completely different problem
could qualify for first priority],"
although it is not suggested
Page 391 U. S. 485
that, priority is needed to encourage invitees to enter the
The United States argues, however, that each tort claim "must be
analyzed in its own context." Apart from the fact that it has been
assumed throughout this case that all 147 claimants were on an
equal footing and it is not very helpful to suggest here for the
first time a rule by which lessees, invitees, and neighbors have
different rights, we perceive no distinction: no principle of tort
law of which we are aware offers guidance for distinguishing,
within the class of torts committed by receivers while acting in
furtherance of the business, between those "integral" to the
business and those that are not. [Footnote 12
We hold that 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 a Chapter XI arrangement.
The judgment of the Court of Appeals is reversed, and the case
remanded for further proceedings consistent with this opinion.
It is so ordered.
MR. JUSTICE MARSHALL took no part in the consideration or
decision of this case.
Section 302 of the Act, as set forth in 11 U.S.C. § 702,
provides in part as follows:
"The provisions of chapters 1-7 of this title shall, insofar as
they are not inconsistent with or in conflict with the provisions
of this chapter [XI], apply in proceedings under this chapter."
Section 64a(1), a part of Chapter VII and hence applicable to
Chapter XI arrangements by virtue of § 302, itself provides that,
where, as here, ordinary bankruptcy ensues upon a proceeding under
"the costs and expenses of administration incurred in the
ensuing bankruptcy proceeding shall have priority in advance of
payment of the unpaid costs and expenses of administration . . .
incurred in the superseded proceeding. . . ."
We deal here, therefore, with a claim that will, in any event,
be subordinate to administration expenses of the bankruptcy
Thus, the merits of negligence claims have not been adjudicated,
and, of course, we intimate no views upon them.
at 391 U. S.
This is explicitly provided in § 302.
3 Collier, Bankruptcy � 62.15:
"Section 2a(5) empowers the court to authorize the business of
bankrupts to be conducted for a limited period by a marshal,
receiver or trustee. Such continued operation of a business is in
substance a means of preservation, namely as a going concern,
sometimes with a view to rehabilitation. . . . Expenditure incurred
by continued operation of a bankrupt's business will, therefore, on
principle, follow the rules . . . as to expenditure in connection
with preservation. The difference, if any, lies in the greater
variety of types of expenses. . . ."
The case that petitioner finds most closely in point is Vass
v. Conron Bros.,
59 F.2d 969. Vass was the receiver of certain
bankrupts who had been dealers in cold meats and had leased space
in their cold storage plant to Conron. Vass confirmed the lease,
one of whose covenants provided that the lessor would maintain
sufficient refrigeration; thereafter, Vass allegedly failed to
refrigerate properly, damaging stored property of the lessee. The
lessee then attempted to sue Vass in a state court, alleging breach
of the covenant and negligence. Vass, however, obtained an
injunction from the bankruptcy court against the state action; the
Court of Appeals affirmed in an opinion by L. Hand.
The issue in Vass was whether the state action would conflict
with the bankruptcy court's jurisdiction over the estate. In ruling
that the action could not be maintained, Judge Hand concluded,
that the action did not fall within the
federal statutory permission for actions based on any liability
arising out of "any act or transaction" of the trustee "in carrying
on the business connected with" the property entrusted to him.
Judge Hand concluded, on special facts, that the trustee in
confirming the lease was merely holding matters in statu
not continuing the business. Consequently, he said
"the liquidation of the lessee's resulting damages was as much a
part of the usual administration in bankruptcy, as that of the pay
of accountants, custodians or other assistants."
59 F.2d at 971. In context, the language just quoted is of
little assistance in the present case.
28 U.S. C § 959(b) provides as follows
"A trustee, receiver or manager appointed in any cause pending
in any court of the United States, including a debtor in
possession, shall manage and operate the property in his possession
as such trustee, receiver or manager according to the requirements
of the valid laws of the State in which such property is situated,
in the same manner that the owner or possessor thereof would be
bound to do if in possession thereof."
This provision, of course, establishes only the principle of
liability under state tort and agency law, and does not decide from
whom or with what priority tort claims may be collected. In
McNulta v. Lochridge, 141 U. S. 327
141 U. S. 332
this Court had occasion to note that
"[a]ctions against the receiver are in law actions against the
receivership, or the funds in the hands of the receiver, and his
contracts, misfeasances, negligences and liabilities are official
and not personal, and judgments against him as receiver are payable
only from the funds in his hands."
This statement, of course, means only that torts of a receiver
are, in principle, compensable out of the assets of the estate in
receivership and, again, does not indicate whether such claims
shall be paid prior to, equally with, or after other claims against
We do not here reach, and do not mean to reaffirm the
implication of McNulta
that an action against the receiver
personally, or against the debtor after termination of the
receivership, would never lie under any circumstances. As to such
questions, the statement of McNulta
370 F.2d 624, 628.
E.g., Texas & Pacific R. Co. v. Bloom, 164 U.
; Bereth v. Sparks,
51 F.2d 441; § 77(n),
11 U.S.C. 205(n), according particular recognition to the tort
claims of railroad employees, does not, as the dissent suggests,
mean that other tort claims are not chargeable against a
receivership itself. Rather, as the United States concedes,
"tort claims arising during a receivership or reorganization
period . . . have generally been given the priority status of
general administrative expenses."
E.g., Nicholas v. United States, 384 U.
. At pages 384 U. S.
-688 we stated:
"Taxes incurred in the pre-arrangement period must be content
with a fourth priority under § 64a(4) of the Bankruptcy Act. On the
other hand, taxes incurred during the arrangement period are
expenses of Chapter XI proceedings, and are therefore technically a
part of the first priority under § 64a(1)."
The Court also ruled that interest accruing on such claims
during the arrangement period would also fall within § 64a(1).
Ibid. See also Boteler v. Ingels, 308 U. S.
3 Collier, Bankruptcy � 62.15:
"Among other expenses incident to conducting a business and
therefore allowable as administrative expenditure may be . . .
payments on claims for personal injuries inflicted in the operation
of a business, rent, insurance, commissions, cost of raw material
or merchandise purchased for manufacturing or resale and any other
expense ordinarily attendant upon active participation in
commercial or industrial life."
MR. CHIEF JUSTICE WARREN, with whom MR. JUSTICE DOUGLAS joins,
In my opinion, the Court has misinterpreted the term "costs and
expenses of administration" as intended by
Page 391 U. S. 486
§ 64a(1) of the Bankruptcy Act and, by deviating from the
natural meaning of those words, has given the administrative cost
priority an unwarranted application. The effect of the holding in
this case is that the negligence of a workman may completely wipe
out the claims of all other classes of public and private
creditors. I do not believe Congress intended to accord tort
claimants such a preference. Accordingly, I would affirm the
On other occasions, this Court has observed that
"[t]he theme of the Bankruptcy Act is 'equality of distribution'
. . . , and, if one claimant is to be preferred over others, the
purpose should be clear from the statute."
Nathanson v. NLRB, 344 U. S. 25
344 U. S. 29
(1952); see Sampsell v. Imperial Paper Corp., 313 U.
, 313 U. S. 219
(1941). More particularly, the Act expressly directs that eligible
negligence claims are to share equally with the unsecured claims in
a pro rata
distribution of the debtor's nonexempt assets.
Bankruptcy Act §§ 63a(7), 65a, 11 U.S.C. §§ 103(a)(7), 105(a).
Departing from this statutory scheme, the Court today singles out
one class of tort claims for special treatment. After today's
decision, the status of a tort claimant depends entirely upon
whether he is fortunate enough to have been injured after, rather
than before a receiver has been appointed. And if the claimant is
in the select class, he may be permitted to exhaust the estate to
the exclusion of the general creditors as well as of the wage
claims and government tax claims for which Congress has shown an
unmistakable preference. [Footnote
] In my view, this result frustrates rather
Page 391 U. S. 487
than serves the underlying purposes of a Chapter XI proceeding,
and I would not reach it without a clear indication that Congress
Congress enacted Chapter XI as an alternative to straight
bankruptcy for individuals and small businesses which might be
successfully rehabilitated instead of being subjected to
economically wasteful liquidation. The success of a Chapter XI
proceeding depends largely on two factors: first, whether creditors
will take the chance of permitting an arrangement; second, whether
other businesses will continue to deal with the distressed
business. With respect to the first of these considerations,
today's decision will undoubtedly discourage creditors from
permitting arrangements, because it subjects them to unpredictable
and probably uninsurable tort liability. I do not believe the
statutory language requires such an interpretation. I would
construe § 64a(1) with reference to the second consideration
mentioned above. In my opinion, the Court would reach a result more
in line with congressional intent and the Bankruptcy Act generally
by regarding as administrative costs only those costs required for
a smooth and successful arrangement. Accordingly, the
administrative cost priority should be viewed as a guaranty to the
receiver and those who deal with or are employed by him that they
will be paid for their goods and services. Any broader
interpretation will discourage creditors from permitting use of the
rehabilitative machinery of Chapter XI and tend to force distressed
businesses into straight bankruptcy.
It is equitable, the Court believes, that the general creditors
(and wage and tax claimants) bear the loss in this case because
they have "thrust" an insolvent business upon petitioner for their
own benefit. I respectfully submit that this is a most unfair
characterization of arrangements. An economically distressed
businessman seeks an arrangement for his own, and not for his
Page 391 U. S. 488
benefit. [Footnote 2/2
course, the creditors will benefit if the arrangement is
successful, just as they would have benefited if the businessman
had been successful without resorting to an arrangement. But a
business in arrangement is no more thrust on the public than is any
other business enterprise which is conducted for the mutual
prosperity of the owners, the wage earners and the creditors.
Realistically, the only difference is that a business administered
under Chapter XI has not been prosperous. If the arrangement is
successful, the owners, wage earners and creditors will all
benefit; if it is not, they will all be injured. Thus, I would not
distinguish in this case between petitioner and the other general
creditors, none of whom was responsible for the catastrophe for
which all of them must sustain some loss. Instead, in deciding this
case, I would adhere to the Act's basic theme of equality of
The Court states that its decision will encourage Chapter XI
receivers to obtain "adequate" insurance. The Court fairly well
concedes, however, that, in this case, "adequate" insurance
"probably could not have been obtained and, in any event, would
have been foolish." In other words, so far as this Court knows, the
insurance taken out by the receiver in this case was, in fact,
"adequate" in the sense that no reasonable receiver could or should
obtain fire insurance in the amount of $3,500,000 on the assumption
that his workman might accidentally cause a fire of the proportions
which occurred here. Moreover, quite apart from the case at bar,
there is absolutely no indication that today's decision is needed
to encourage receivers to obtain insurance. [Footnote 2/3
] I see no
Page 391 U. S. 489
basis in the Act or in sound policy for a ruling that the
creditors of an estate under a Chapter XI arrangement become
involuntary insurers against a liability which probably would not
and should not be insurable by more traditional means.
The Court also relies, in my opinion mistakenly, upon analogies
to equity receiverships. In reorganizations under Chapter X
] and § 775 [Footnote 2/5
] Congress has directed the
courts to apply the rules of priority developed in equity.
arrangements under Chapter XI are governed strictly by the
statutory priorities fixed by § 64a. These statutory priorities
differ in many respects from those applicable to equity
receiverships, [Footnote 2/7
they have been amended repeatedly to narrow the class of claimants
which may participate ahead of the general creditors. [Footnote 2/8
] Furthermore, even in the case
of § 77 reorganizations where the priorities developed in equity
are controlling, Congress has specifically provided for one
exception to the rule that tort claimants are to be treated as
general creditors. Bankruptcy Act § 77(n), 11 U.S.C. § 205(n).
Page 391 U. S. 490
That exception is in favor of a narrowly defined class of
claimants. Congress has not expressly provided a similar exception
to cover petitioner's tort claim, and I would not infer one.
Finally, the Court concludes, for two reasons, that it is
"linguistically more comfortable" to treat petitioner's claim as an
administrative cost, rather than as a negligence claim which could
have been proven under § 63a(7). First, § 63a refers to provable
claims against the debtor and not against his estate. Second, §§
63a(7) and 302 require that an action be commenced on the claim
before the filing of the arrangement petition, and allowing claims
like petitioner's would in effect toll the time limitation imposed
by these sections. With respect to the first of the Court's
reasons, I find no statutory or practical basis for distinguishing
between the debtor and his estate in this case. Had the arrangement
been successful, the debtor would have been liable for any damages
occasioned during the administration under the line of cases relied
upon by the Court. Texas & Pacific R. Co. v. Bloom,
164 U. S. 636
(1897). The suggested distinction between "debtor" and "estate"
would be meaningful only if the two words pointed to different
sources of liability. Here, petitioner's negligence claim, if
allowed, would diminish the debtor's estate irrespective of whether
it were treated as an administrative cost under § 64a or as an
ordinary negligence claim under § 63a(7). With respect to the
Court's second argument, Chapter XI provides that the straight
bankruptcy provisions, including § 63a(7), are applicable to
arrangement proceedings only "so far as possible." Bankruptcy Act §
378(2), 11 U.S.C. § 778(2). I have no difficulty in concluding
that, where the claim does not arise until after the arrangement
petition is filed, it is manifestly impossible for a lawsuit on
that claim to precede the filing of the petition. Further, I
Page 391 U. S. 491
of no more complete way to "read the time limitation out of §
63a(7) of the Act" than by treating certain negligence claims as
administrative costs as the Court does in this case.
I see no basis in equity or in the statutory language or purpose
for subjecting every class of creditors except petitioner's to a
loss caused by the negligence of a workman. Consequently, I would
construe "actual and necessary costs" as limited to those costs
actually and necessarily incurred in preserving the debtor's estate
and administering it for the benefit of the creditors. I would not
include ordinary negligence claims within this class.
Certain wage claims and government taxes obtain second and
fourth priorities respectively under the second and fourth
subdivisions of § 64a, 11 U.S.C. §§ 104(a)(2), 104(a)(4). The
government tax claims in this case, nearly all of which will be
excluded from sharing in the estate under today's decision, amount
to approximately $245,000.
Unlike straight bankruptcy, only the debtor himself may file a
petition for an arrangement under Chapter XI. Bankruptcy Act §§
321, 322, 11 U.S.C. §§ 721, 722; 8 Collier, Bankruptcy 4.02.
In fact, the absence of any other adjudicated case on the
question here presented is a strong indication that the receiver's
insurance is usually perfectly adequate.
11 U.S.C. §§ 501-676.
11 U.S.C. § 205.
Bankruptcy Act §§ 77b, 115, 11 U.S.C. §§ 205(b), 515; see In
re Chicago Express, Inc.,
332 F.2d 276, 278 (C.A.2d Cir.1964).
Section 102 of the Act (11 U.S.C. § 502), which is applicable to
corporate reorganizations, specifically provides that § 64 "shall
not apply in such proceedings unless an order shall be entered
directing that bankruptcy be proceeded with. . . ."
To take but two examples, government tax claims obtain a higher
priority in equity receiverships and under Chapter X than they do
under § 64a, see
Bankruptcy Act § 199, 11 U.S.C. § 599; 6A
Collier, Bankruptcy � 9.13, and the "six-months rule" applied to
equity receiverships has no analogue under § 64a. See Dudley v.
147 F.2d 268 (C.A.2d Cir.1945).
Act of July 1, 1898, c. 541, § 64a, 30
Stat. 563, with
Act of May 27, 1926, c. 406, § 15 [64a],
44 Stat. 666; compare
80 Stat. 270, 11 U.S.C. §§ 35,
104(a)(4) (1964 ed., Supp. II), with
Act of June 22, 1938,
c. 575, amending §§ 17a(1), 64a(4), 52 Stat. 851, 874.