READING CO. v. BROWN
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Owen B. Rhoads
Chief Justice Earl Warren: Francis Shunk Brown, 3d, etc.
Mr. Owen B. Rhoads: May it please the Court.
I would like, if I may, to enter two questions which were asked by Mr. White yesterday, by members of the court.
Mr. Justice Black asked how the fire started.
On the record, this is a fire of undetermined origin.
For the purposes of this argument we of course have admitted negligence of the receiver but it's a fire of undetermined origin.
Mr. Chief Justice, you asked whether and about the availability of the bond.
The bond is a performance bond.
It is available, of course.
Its amount doesn't meet the enormous claims here.
This matter would be here no matter what the amount, I believe, because we feel so strongly that this claim, an unliquidated claim for property damages, arising from a negligence a receiver during a Chapter XI proceeding is not entitled to the first status priority which claimants seek.
As Your Honors have said in recent cases, very recent cases, where a priority is sought, the burden on the claimant is a very heavy one.
And may I quote Your Honor's words in the case of Nathanson against the National Labor Relations Board in which this Court said the 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.
We submit that there's no such clarity here.
The Act is unim -- is unambiguous.
If claimant is to succeed, he must concisely and convincingly bring the claim within Section 64, subsection (a) (1) of the Act.
That Act provides that cost and expenses of administration, including the actual and necessary cost and expenses of preserving the estate subsequent to the filing of the petition, are entitled a first priority.
Justice Hugo L. Black: Why isn't the operation of a business by the receiver in order to carry on the business for the purpose of preserving and as far as possible?
Why are not the expenses of that carrying on?
What are the administrative expenses?
Mr. Owen B. Rhoads: The expenses of carrying on that business, Your Honor, most certainly are cost and expenses of administration, provided they are necessary and this necessary is based on the definition and narrow wording of the statute and there can be no question.
If the costs are necessary such as are closely and approximately related to the carrying on the business, costs which can be reasonably anticipated.
They are cost of administrations entitled of first priority.
Justice Hugo L. Black: Suppose they were operating a railroad and the Indians had threw sparks out during the operation, would that be a part of the administrative expenses?
Mr. Owen B. Rhoads: If Your Honor pleases, that would be dealt with under Section 77 on the railroad reorganization sections which in -- which codify the equitable principle.
They are not applicable to either Chapter XI or the liquidating bankruptcy proceedings.
Congress has of -- has provided for a different set of rules applicable to situations involving railroads as the Acts so clearly shows in Section 77 (n).
Justice Hugo L. Black: Well, if it's necessary to carry on the business, why can you -- how can you say it's not necessary?
Mr. Owen B. Rhoads: If it's necessary to carry on the business, Your Honor, it is a cost and expense of administration.
But there is nothing necessary about negligence in the use of the word --
Justice Hugo L. Black: I never said that was negligence but there is something necessary about carrying on the business out of which the negligence come?
Mr. Owen B. Rhoads: Your Honor please, I don't think there can be any question that the cost of repairs, cost which go directly to either developing, preserving or liquidating in a estate are cost and -- as an expense of administration.
But uncontemplated, negligent results -- expenses, which result from such things cannot be considered necessary.
Justice Hugo L. Black: Why can't -- why do you --
Mr. Owen B. Rhoads: Necessity and negligence are emphatetical in the language.
Justice Hugo L. Black: Why do you not have to contemplate that in the operation of the business of this kind, it might be negligence?
Why is it not just --
Mr. Owen B. Rhoads: I think it would be perfectly reasonable therefore.
And I think that practice will show that the payment of the insurance premium such as to establish the estate here are reasonable cost and necessary cost.
This is, they contemplate the carrying on of a business.
It's the reasonableness not the failure to act as a reasonable man which comes into this definition of actual and necessary.
Justice Hugo L. Black: I was asking you this question, not to indicate any --
Mr. Owen B. Rhoads: I appreciate that.
Justice Hugo L. Black: -- of any conclusion but to rather challenge your idea that this is unambiguous as you say it is.
Mr. Owen B. Rhoads: To me the Act is unambiguous because you must read Section 64 subsection (a) (1) in the light of the definition section and it is cost and expenses of administration are defined in this Act.
Justice Potter Stewart: But the Government in its brief, as I read it, seems to concede that some torts might be cost of administration.
In your answer to Justice Black, did I detect to your agreement with that and otherwise let's assume that this is not a railroad which is covered by different statute but a dry cleaning establishment and one of its trucks doing a Chapter XI interval, one of its trucks delivering clean clothes to the customers that negligently struck somebody.
Would that be -- would that kind of a tort be in your view under the --
Mr. Owen B. Rhoads: Mr. Justice Stewart, I think this is a very interesting -- intellectual -- my point of view, under the Act expressly worded, it would not be.
Justice Potter Stewart: It would not be.
Mr. Owen B. Rhoads: I think a more strict view of the Act than the Government does.
Justice Potter Stewart: Alright.
Mr. Owen B. Rhoads: I think that it is possible that --
Justice Potter Stewart: Or a customer coming in to the store and --
Mr. Owen B. Rhoads: And tripping -- coming in your dry cleaning establishment --
Justice Potter Stewart: Yes.
Mr. Owen B. Rhoads: -- coming in and tripping --
Justice Potter Stewart: Yes.
Mr. Owen B. Rhoads: -- for the purpose of preserving continuing developing aspect?
Justice Potter Stewart: Yes.
Mr. Owen B. Rhoads: This is very interesting.
This is very close.
I disagree on the Act as it a -- as it pre -- readilly --
Justice Potter Stewart: Do you think no tort --
Mr. Owen B. Rhoads: I think this should be for Congress.
Justice Potter Stewart: Do you think no claims and negligence of any kind?
Mr. Owen B. Rhoads: No claim.
My position is a very strict one and it would be that no claim.
Justice William J. Brennan: But that would go this far than Mr. Rhoads.
I gather Knight really leased, didn't they?
Mr. Owen B. Rhoads: Knight really leased -- it was an industrial building of 8-storey --
Justice William J. Brennan: Well I suppose under the lease arrangement, as I take it usually happens.
There are certain repairs which are the responsibility of the receiver.
I suppose it was a pipe and it needed a welding job or something and then an employ --
Mr. Owen B. Rhoads: A cost of repair?
Justice William J. Brennan: Yes -- no.
I suppose it's an employee of the receiver, on the maintenance crew --
Mr. Owen B. Rhoads: Yes.
Justice William J. Brennan: -- who went to the leased premises using a blowtorch negligently, he caused this fire.
Even then, you'd say this is was not --
Mr. Owen B. Rhoads: I would say that this is not a cost and expense of administration as --
Justice William J. Brennan: Oh, the only thing that would be --
Mr. Owen B. Rhoads: -- as provided for in the Act.
Justice William J. Brennan: The only thing that would be I gather is the cost of the material that the employee had to use and his wages and that sort of things, is that it?
Mr. Owen B. Rhoads: The necessary expenses.
You cannot read this Act.
The administrative expenses cannot be read separate from the word “necessary”.
In 64(a) (1), you have the words “Cost and expenses of administration”, including the “Actual and necessary cost” preserving the estate subsequent to filing the petition.
Now, obviously, these are not, this claim is not within the “including the actual and necessary cost of filing subsequent to the petition.”
Justice William J. Brennan: Although, certainly in my hypothetical.
Mr. Owen B. Rhoads: It --
Justice William J. Brennan: The repair was necessary to the operation of the business of leasing the premises.
Mr. Owen B. Rhoads: No question of the cost of that would be an expense.
Justice John M. Harlan: What would you say if this is not Chapter X?
Mr. Owen B. Rhoads: No, because again you're --
Justice John M. Harlan: No, what?
Mr. Owen B. Rhoads: -- it would -- if -- I mean it might well have been but we are not concerned with a Chapter X proceeding here because -- that you have a different set of rules, a greater adoption or adaptation into the procedures provided by Congress of looser roles.
Justice John M. Harlan: I am right (Inaudible) that Section 64 which says, it's applicable to Chapter XI?
Mr. Owen B. Rhoads: Yes, Your Honor.
They -- there are specific sections of the Act which incorporate all of the liquidating bankruptcy provisions in the Chapter XI proceedings and say that Chapter XI proceedings are governed by that section of the procedures as established by the Act and by no others --
Justice Byron R. White: But the provision that says 64 is applicable says that insofar as consistent with -- and insofar is not inconsistent with this chapter.
Mr. Owen B. Rhoads: With Chapter XI.
Justice Byron R. White: That's right.
Mr. Owen B. Rhoads: Yes.
And there is nothing inconsistent in the --
Justice Byron R. White: Well, there's a --
Mr. Owen B. Rhoads: It's correct.
Justice Byron R. White: -- difference between the aims of Chapter XI and the aims of bankruptcy.
Mr. Owen B. Rhoads: In a very --
Justice Byron R. White: Well, you must -- there's nothing that -- there's no way to rehabilitate anything straight bankruptcy and there certainly is in Chapter XI.
Mr. Owen B. Rhoads: No, but the preservation --
Justice Byron R. White: And the -- and normally you don't --
Mr. Owen B. Rhoads: -- elements of both are the same.
Justice Byron R. White: Oh yes, but normally you don't continue a business and with -- and you don't run a business in bankruptcy.
You liquidate a business.
You -- and in XI, the whole idea is to keep the business going and use this -- the debtor in possession.
And the -- so the whole object is to continue the business and to operate it.
Mr. Owen B. Rhoads: Yes, Your Honor.
At times it is the debtor --
Justice Byron R. White: At times --
Mr. Owen B. Rhoads: -- who's in possession --
Justice Byron R. White: -- it always is in XI.
Mr. Owen B. Rhoads: It was not -- it was not so in this case.
Justice Byron R. White: But during the XI proceeding?
Mr. Owen B. Rhoads: No, Your Honor.
Justice Byron R. White: Well, --
Mr. Owen B. Rhoads: To read the --
Justice Byron R. White: How do you say the --
Mr. Owen B. Rhoads: The receiver is the trust -- that the trustee here was the receiver.
Justice Byron R. White: How do you get a petition under Chapter XI approved?
I mean, you have to allege -- that makes some allegations, don't you, that you want to extend and pay off some of your debts --
Mr. Owen B. Rhoads: Correct.
And it is a -- it is -- your Chapter XI is a rehabilitation proceeding but --
Justice Byron R. White: That's what I said.
Mr. Owen B. Rhoads: -- it is -- but it is not always the debtor in possession.
It is a --
Justice Byron R. White: Oh, I agree, not always, no, I agree with that.
Mr. Owen B. Rhoads: Oh, I'm sorry, I misunderstood Your Honor.
Justice Byron R. White: No, I agree not always but there were -- certainly, there was a receiver here, a trustee here.
Mr. Owen B. Rhoads: Yes.
Justice Byron R. White: Exactly.
But the aim was to rehabilitate this but --
Mr. Owen B. Rhoads: The aim was to rehabilitate --
Justice Byron R. White: -- and operate the business.
Mr. Owen B. Rhoads: -- and to operate the business just as in liquidating bankruptcies quite often there's a period of considerable length of operating the business and attempt to preserve and to secure the maximum equitable distribution upon general creditors of the greatest asset possible.
Justice Abe Fortas: Does the Reading Company have any remedy here for the injury suffered?
Mr. Owen B. Rhoads: The Reading Company has -- I submit, Your Honor, two remedies.
The bond, as suggested by Mr. Chief Justice which is of course in amount is inadequate.
It also has --
Justice Abe Fortas: Does this bond cover tort --
Mr. Owen B. Rhoads: I think it's a --
Justice Abe Fortas: -- its in the receiver or?
Mr. Owen B. Rhoads: I don't think there's any question.
It's a performance bond.
Now it may be that courts shouldn't require larger bonds than they had.
But it's a performance bond --
Justice Abe Fortas: But if -- just a moment on that.
Is it a performance bond for the benefit of third parties?
Mr. Owen B. Rhoads: I would -- Your Honor, I must say I have not read the terms of that bond carefully not to say with certainty.
Justice William J. Brennan: Well, if this is a -- this is not --
Mr. Owen B. Rhoads: But I assume it is.
Justice William J. Brennan: If this is not part of the administration, how does the court -- perform bond reach it?
Mr. Owen B. Rhoads: There's no question, this is part of the administration but it's not every cost and expense in the administration which is entitled to the first priority.
Justice Abe Fortas: What's the other remedy?
You said they're --
Mr. Owen B. Rhoads: The plenary suit.
Justice Abe Fortas: Against who?
Mr. Owen B. Rhoads: Mr. White, my opponent already has a plenary suit, which is referred to in one of my --
Justice Abe Fortas: Against whom?
Mr. Owen B. Rhoads: -- witness.
Against the I.J. Knight -- the receiver, I.J. --
Justice Abe Fortas: Personally?
Mr. Owen B. Rhoads: No.
Justice Byron R. White: It's not a suit against the company?
Mr. Owen B. Rhoads: It's against Francis Shunk Brown as receiver.
Justice Byron R. White: That's right.
That's an easy -- and to attempt to pass personal liability --
Mr. Owen B. Rhoads: Personal --
Justice Byron R. White: -- to him.
Mr. Owen B. Rhoads: -- the liability.
Justice Byron R. White: That's right.
There are those the only two remedies that you can think of?
Mr. Owen B. Rhoads: Those are the only two remedies that I can think of.
I think that it's the --
Justice Abe Fortas: And if he -- and if the trustee has to respond and Mr. Knight has to respond here, he has no recourse over against the estate of the company, does he?
Mr. Owen B. Rhoads: If -- Your Honor, it seems to me that if there were an estate of the company which survived liquidation as in Mr. White's suggestion yesterday of discovering the $10,500,000 goldmine, there's no question that the receiver standing in the position of the debtor that that estate would be liable and the Reading Company with its three million five would come out --
Justice Abe Fortas: Well if --
Mr. Owen B. Rhoads: -- more than that.
Justice Abe Fortas: Well, then that's just to ring around the rose, he had in that, not clear if that's a correct theory because what you're saying now -- the following, as I understand it, there's a fire caused by the negligence of the receiver.
The receiver can be sued on his personal capacity.
The receiver then has recourse over against the bankrupt estate.
Now if that is so, then in that effect of this is that the bankrupt estate for whatever it may be, whatever may be in that estate is liable to the persons suffering from tort.
Mr. Owen B. Rhoads: This is a claim which isn't discharged by bankruptcy.
Justice Abe Fortas: Now, what you are saying, it's a claim against the estate --
Mr. Owen B. Rhoads: And --
Justice Abe Fortas: -- and not just a claim against the receiver?
Mr. Owen B. Rhoads: It's a claim against the estate because the receiver in being sued stands in the position of the bankrupt under the Act.
Justice Abe Fortas: Now what you're saying is that it's a -- it is not entitled.
It's a claim, which is not entitled to -- Oh, it can't be that either.
Suppose a receiver had judgments obtained against the receiver while the bankruptcy proceedings is still pending then the receiver has a claim over against the estate, you've tell me for -- to be made whole, is that right?
Mr. Owen B. Rhoads: Yes.
Justice Abe Fortas: Now suppose the bankruptcy is still pending, he has at least a general claim against the estate.
Does he have a priority claim as the cost of the administration?
Mr. Owen B. Rhoads: He has no priority claim for where it say “negligence” claim --
Justice Abe Fortas: Or does -- where does he rank?
Mr. Owen B. Rhoads: -- under the Act.
Justice Abe Fortas: Does this claim rank along with other creditors?
Mr. Owen B. Rhoads: Not having occur under the Act, not had the -- tort, not having occurred prior to the filing of petition and no suit having been, as the Act requires, filed and pending prior to the filing of this, he does not serve, he does not come in as a general creditor.
Justice Abe Fortas: And how does he come in?
Mr. Owen B. Rhoads: He comes in as a claim, undischarged in bankruptcy because it is one not provable under the Act and would be on the same position as any negligent -- judgment creditor against an insolvent individual whether there had been no bankruptcy.
This is a statutory proceeding and as this Court has repeatedly said, the -- there must be a convincing establishment of a right to this priority.
And if you take the words of this Act, that the words of this Act as I have attempted to indicate if the only words that this can -- claim can be possibly be hang on are cost and expenses of administration.
Now, cost and expenses of administration are defined by Section 62 subsection (a) (1) of the Act.
The Act uses the words “the costs of administering this section of the Act”.
It uses the word, “the cost of administering the estate” and it defines them as the actual and necessary cost incurred by officers other than referee in the administration of estates.
The word “necessary” is again emphasized.
It cannot be ignored and as I have said in my opinion, there is no necessity in negligence and necessary and negligence or antithetical words.
An unliquidated tort claim such as this has no place in as a first priority.
This is shown not only by the strict wording of the Act but is also shown by Congress' consideration of negligence claims here -- of tort claims in amendments of the Act and on occasions when it has considered amending the Act.
This has occurred twice.
Justice Byron R. White: If this Chapter XI proceeding had succeeded and if the -- if there hadn't been a petition filed in ordinary bankruptcy, I suppose that this -- there could been a suit against the debtor, against the company.
Mr. Owen B. Rhoads: There would have if the negligence which we've admitted been established in claims, they would have recovered out of the rehabilitated business.
Justice Byron R. White: That's right.
Mr. Owen B. Rhoads: And probably the public liability policy.
The receivers and trustees take public liability policies out and it is to this sort of reasonable, actual, necessary expense that these claims look.
Justice Byron R. White: Was there insurance here?
Mr. Owen B. Rhoads: Liability?
Mr. Marx, who is my co-counsel here advised me there's a public liability policy but obviously not adequate enough for anything like this.
And if Your Honor pleases, Congress has considered whether tort negative claims based on negligence should be even allowed in bankruptcy proceedings and in the Bankruptcy Act.
In 1933, Congress considered and codified under the railroad reorganization section of the Act, giving a right to and giving a -- in this case, giving a priority to claims for personal injuries, to employees of a railroad corporation, claims of personal representatives of deceased employees of railroad corporations.
This by Section 77 (n) gives a priority to these two tort claims in railroad reorganization.
But note well, no priority is given to property damage claims based on negligence and no mention is made of property damage claims based on negligence.
Congress was considering torts at that time.
Now again, a year later, Congress considered --
Justice William J. Brennan: Well, is that amendment -- is that amendment relate only to claims for negligence in -- it was brought about by the receiver?
Mr. Owen B. Rhoads: So I believe, Your Honor; in my reading of the section, yes.
This is a case based of course on the continued operation of the railroad.
This is a rehabilitation proceeding.
If Your Honors, please, a year later in 1934, Congress provided by Section 63, subsection (a) (7) that claims in negligence where the suit had been pending prior, have been instituted and pending, prior to the institution of the petition, were provable claims and those are the only negligence claim which are provable claims in a liquidating bankruptcy and it is only by Section 62 subsection (a) (1) that cost and expense of administration are provable.
And that Section limits those provable costs and expenses to actual and necessary ones.
If Your Honor pleases, the history of the Bankruptcy Act, the policy of the Bankruptcy Act, which is to preserve an estate for liquidation and the wording of the Act, I submit all, on all three grounds, show that this claim does -- is not a claim which convincingly can be established as a priority claim and to grant it would frustrate the policy which Congress has established.
It may be wrong philosophically but it is a policy established by Congress in the wording of this Act and allows and makes no provision for claims such as this.
To grant it would frustrate the Act completely.
Thank you, Your Honors.
Chief Justice Earl Warren: Mr. Roberts?
Argument of Richard M. Roberts
Mr. Richard M. Roberts: Chief Justice, may it please the Court.
There are several results that this Court could reach in this case.
The Government submits and agrees verily that this is not a proper cost of administration entitled to a class 1 priority.
The purpose of the Chapter XI proceeding is to rehabilitate a distressed organization.
It allows as cost of administration those expenses that are necessary to rehabilitate the corporate -- either a corporation or an individual.
Chapter XI proceedings are separate and distinct from Chapter X reorganizations.
For instance, in Chapter X, Section 64 priorities do not apply.
Also by statute in Chapter X reorganizations, Congress has made the equity receivership rules applicable.
It says the Court shall sit and have the powers of a receiver in equity.
And that I think is why you find that in some aspects in bankruptcy, they refer to the receivership cases.
In fact, the case cited by Collier for his proposition that negligence are allowable as priority claims in cost of administration is a railroad receivership case.
Justice Byron R. White: Well, mister, you -- would you hazard against us to what would happen to this claim in a Chapter X case?
Mr. Richard M. Roberts: In a Chapter X case in this -- I really do not know, Mr. Justice White what would happen in a Chapter X reorganization proceeding.
There are several.
There is no tri-parties schedule.
In the equity --
Justice Byron R. White: Well, isn't that --
Mr. Richard M. Roberts: -- railroad receiverships, however, Mr. Justice White, they rank the priorities and there's cost to administration.
If you read the railroad cases that had been cited, they refer their bond holders who are contending that they come ahead of certain classes of creditors.
In those cases --
Justice Byron R. White: What claims are -- tort claims are connected with operating a business aren't normally cost of administration of some kind or in -- or in -- but or rather in railroad reorganizations.
Mr. Richard M. Roberts: In railroad reorganization --
Justice Byron R. White: And I thought only in Chapter X.
Mr. Richard M. Roberts: They're not referred to, however, Your Honor, as cost of administration.
If you read the cases, they list their cost of administration and then they come down and generally surround the fourth or fifth class; that they refer to tort claims are allowed ahead of bond holders of the corporation.
They do not refer to them specifically as cost of administration is.
I read those cases.
They rank them much in the same way as Section 64 and Chapter XI rank certain classes of creditors.
Justice Byron R. White: Well, Collier seems to think that tort claims are payable as a cost of administration in Chapter X.
Mr. Richard M. Roberts: In Chapter X, yes then he cites --
Justice Byron R. White: As and the -- if they are, it's because they are necessary incidence to the running of the business.
Mr. Richard M. Roberts: And I think -- as we point out, we believe that some tort claims could be allowable in this type of proceeding where they are necessary, where they are covered -- could be covered by a liability insurance, for instance in a cab operation.
Surely the city or municipality where the cab company is operating requires liability insurance.
I do not believe that a trustee could ignore that requirement and I don't think the insurance company could defend on the ground for the trustee is not liable for torts.
I think that the trustee's insurance would cover in those instances.
And I believe that in this --
Justice Potter Stewart: Performance bond too?
Mr. Richard M. Roberts: I beg your pardon?
Justice Potter Stewart: Performance bond too with the (Inaudible)?
Mr. Richard M. Roberts: I would think the performance bond could be looked to.
In fact, there is one company here who is suing the trustee and I assume they are looking to his performance bond as one of the means of recovering.
I think also that they would look to the bankrupt.
Now, in this instance, absent -- the negligence claims, as I total the claims, an absence -- tremendous administrative expenses, which are not as yet -- have not as yet been allowed.
There will be a sum remaining in this bankruptcy.
If you total the creditors, they are less in total amount than their limits as we understand that it will be recovered under the fire insurance so that there would be an amount that would go back to the bankrupt if he were discharged; if there were no other claim.
Justice William J. Brennan: Is the estate now just the proceeds of the insurance?
Mr. Richard M. Roberts: As I understand, it's just the proceeds to the insurance.
Justice William J. Brennan: What about the ground or the land?
Rebuttal of Owen B. Rhoads
Mr. Owen B. Rhoads: May answer Your Honor, in -- the city has condemned the land.
The proceeds of that will be --
Justice Byron R. White: I see.
Mr. Owen B. Rhoads: -- part of the estate.
Rebuttal of Richard M. Roberts
Mr. Richard M. Roberts: Now, we believe that this Court in Nicholas has lead away to the -- a way that the court claimant here could have recovered or could have at least presented his claim if he had met the requirements of 63, Section 63 of the Bankruptcy Act.
And that is --
Justice Byron R. White: The problem with that, Mr. Roberts is, isn't it that 63 talks exclusively about claims against the bankrupt?
Mr. Richard M. Roberts: That is correct Your Honor, but I don't believe that --
Justice Byron R. White: And Nicholas doesn't deal with that?
Mr. Richard M. Roberts: No, it doesn't deal with that but I do not believe that it would do violence to the Bankruptcy Act to interpret that there are the three separate periods, which is the periods, free bankruptcy, there is the Chapter XI arrangement period and then there's this great bankruptcy period.
And if you do that, then a tort claim would -- during the Chapter XI reorganization would come in as a general creditor.
And we feel that that is the equitable result to reach in this type of situation that there he shares with the other general creditors.
It is merely happen -- instance that one tort claimant would be three-bankruptcy and another one, Chapter XI reorg -- arrangement proceeding, tort claimant.
In fact, in many cases, Mr. Justice White point out it is a debtor in possession who is operating the business and it's the same person operating the business who is -- who operated three Chapter XI arrangements.
And we feel that in no circumstances where there is a Chapter XI that it would no violence to the statute.
To read 63 as being applicable and that the bankrupt includes the period pre straight bankruptcy.
Justice Potter Stewart: Of course, even so in this particular case the Reading Company couldn't get a benefit of that because they didn't sue in time, isn't that correct?
Mr. Richard M. Roberts: They didn't sue in time but I don't believe that that would preclude them completely, Your Honor.
It might rank them below the other general creditors who've had then diligent and who have sued.
Well, I submit that it's no different than a tort claimant who might have had the same thing happen three days prearrangement in any circumstances.
There are some creditors who are not going to get paid and will not get paid in full.
That is the purpose of an arrangement, so that a distressed business when it is technically insolvent can arrange its affair so that it may survive in the business world.
And it's the intent of Congress that that type of business should survive.
It was the intent of Congress in passing the Chapter XI arrangement proceeding that they have a way of arranging their businesses.
A creditors get together -- you know, I'm sure and arrange what they would take on their claims.
Now, it's interesting to note that on the issue of whether or not there's a constitutional right to a recovery.
It seems to me that the cases in bankruptcy involving a landlord which are discussed in the Connor case in this Court cited in our brief, where the landlord had no recovery whatsoever, this is the instance -- for instance where the premises are leased to a business for a long period of time, that business goes bankrupt.
The trustee can reject the lease and that's an action of the trustee in rejecting a lease not the bankrupt.
Now, prior to an amendment to 77 of the Bankruptcy Act, the landlord had to look as this Court said to the empty shell, the corporation for any recovery, there was no recovery whatsoever.
Congress then allowed, taking that that was an equitable to allow him no recovery, then amended Section 77 of the Bankruptcy Act to allow a three-month period of rent to the landlord.
This Court upheld that section and said there was no constitutional restriction of that type on the lease; that the landlord was not entitled to damages for the full term of the lease and we submit that there's no problem here in this respect.
Justice Byron R. White: Mr. Roberts, what would you say if this had been a small fire and the damage is $12,000 to a -- $10,000 to adjoining property and the Chapter XI proceeding just continued on and that -- what would've happened to that $10,000 claim?
Mr. Richard M. Roberts: I believe that it would have been settled as other claims of the bankrupt are settled, Your Honor.
Justice Byron R. White: And what do you mean by that?
Mr. Richard M. Roberts: Well, in a -- rather -- other, oh it is a bankrupt in the --
Justice Byron R. White: Oh, it's just --
Mr. Richard M. Roberts: -- in the arrangement proceeding.
Justice Byron R. White: Let's say the other debts of the debtor had been extended for five years and the person who is damaged, $10,000 worth by the operation of the building by the trustee wants immediate payment.
They say this is an expense of administration which must be paid along with other expenses of administration.
That means now not five years from now.
And the question is, is it an expense of administration under Chapter XI proceeding?
Mr. Richard M. Roberts: My answer to that is no, it's not an expense of administration, Your Honor.
It would be looked on under our view in this way, he could sue the trustee and then if the business then goes into straight bankruptcy, he would be --
Justice Byron R. White: Never does, --
Mr. Richard M. Roberts: I understand that.
But if he does, he would come under 63 but by not -- either him not putting it on the straight bankruptcy or other creditors not putting the bankrupt into straight bankruptcy.
Our position is that he would then share, he would be one of the creditors who will be dealt with in the arrangement proceedings.
Now, whether he accepts the proceedings or not, as I read the arrangement, Chapter XI arrangement, the court may approve a proceeding if a majority of the creditors approve it.
Justice Byron R. White: Well, of course, the arrangement's already been approved and the -- in my example, he filed the plan, it's being carried out.
Mr. Richard M. Roberts: And there's -- the trustee has been discharged there.
Justice Byron R. White: No, no.
Mr. Richard M. Roberts: Why I think of the plan -- if everything has worked out, as I understand Chapter XI proceedings, if everything is worked out, business is turned back to the debtor and he operates normally, it's not by trustee.
Justice Byron R. White: Do you think that -- you think the tort claim though is at -- that $10,000 tort claim is recoverable somehow from the debtor or from the trustee in a Chapter XI proceeding?
Mr. Richard M. Roberts: If the remedy is there, whether it's recoverable or not will depend on the amount of money available.
Justice Byron R. White: Well, let's assume the -- well, its recoverable, as it's recoverable as the rest of the debts.
Mr. Richard M. Roberts: As the rests of the debts, yes.
It would then be --
Justice Byron R. White: You would get -- you just -- your argument is that it just doesn't get priority?
Mr. Richard M. Roberts: That's correct.
We say --
Justice Byron R. White: Do you think it's provable in a Chapter XI.
Mr. Richard M. Roberts: Yes, I think its provable if -- and then if he depends whether if its provable in a straight bankruptcy it would depend on whether or not they had started their suit as 63 requires prior to the straight bankruptcy being filed.
I don't believe that a trustee can operate a business and not have claims against him provable.
I don't believe that Act should be read that way.
Justice Byron R. White: Well what If it is provable -- if its provable in Chapter XI -- that claim is provable in Chapter XI had there been no bankruptcy?
I don't see why it isn't for that very reason, wholly aside from 63 (a) (7) provable in bankruptcy.
If bankruptcy ensued?
Mr. Richard M. Roberts: It's provable in bankruptcy but you have to meet certain conditions to be provable in bankruptcy and they have to meet those conditions.
If they meet those conditions, we submit under our argument that they would be provable.
And we feel that --
Justice Potter Stewart: But even in your argument as to -- under 63 (a) (7) since the suite was not filed in time here, this petitioner, the Reading Company, it can't take advantage of that and so in this case, what is your theory?
Mr. Richard M. Roberts: In this case, my theory is --
Justice Potter Stewart: As to which remedy, do you think?
Mr. Richard M. Roberts: If as to which remedy is sue the trustee and then when there is an overages, there will be in this case.
Justice Potter Stewart: And it will -- and this will --
Mr. Richard M. Roberts: It will share in that.
Now, counsel for the bank, for the claimant --
Justice Potter Stewart: After discharge, you mean after discharge there will be a --
Mr. Richard M. Roberts: There'll be -- there's a sum of money available.
If I read that the claims have been totaled correctly, and I believe that they have.
And I do not believe the cost of administration although there are litigation expenses I have no idea what the court is going to allow as a cost of administration.
But assume that the cost of administration is not great enough to eat up what's left, there will be something here for these claimants.
Now, yesterday --
Justice Potter Stewart: And what -- because there'll be something which -- to which it is entitled, why?
Because they have claims that survived bankruptcy not having been provable in bankruptcy?
Mr. Richard M. Roberts: Yes, sure Your Honor.
Justice Potter Stewart: That's --
Mr. Richard M. Roberts: That's the reason it would be -- it would survive bankruptcy where it's not proved.
Justice Potter Stewart: Because --
Mr. Richard M. Roberts: Any claim that's not provable is not discharged.
Justice Potter Stewart: Well, I know that.
But this -- this of course, was not a claim and negligence against the bankrupt and that's the kind that survived.
Mr. Richard M. Roberts: In this -- well, this Court has passed on this question on several railroad cases where the bankrupt -- after the bankruptcy proceeding, after the trustee, and equity receivership there.
It would've -- property was given back to the owner and the claims against the trustee for them allowable against the property although it was the negligence of the trustee.
They're Texas and Pacific Railway Company, the Johnson at 151 U.S., 81, and another Texas in Pacific Railway versus Bloom at 164 U.S. 636.
Now, I believe that in that instance and in the instance that was resided yesterday where goldmine is found and there's $10,000,000 in that goldmine, I can't believe that the court is not going to allow the claim to be presented against the bankrupt.
Justice Abe Fortas: You don't' believe that the trustee has personal liability even after he's discharged?
Mr. Richard M. Roberts: Personal liability, I think that would depend on the negligence, Your Honor, and that has not been litigated here as to what the negligence were.
The allegations of negligence, I doubt very seriously, that they would warrant a personal liability of the trustee.
Justice Abe Fortas: Because I got the -- presume that the preceding counsel took the opposite view.
Mr. Richard M. Roberts: He said the bond, if I understood, he said that the bond would be --
Justice Abe Fortas: But then he went further than that and said that there would be personal liability on the part of the receiver and I gather that, perhaps wrong, that his position was that -- to me personal liability on the part of the receiver even if there were no willfulness that it's just straight negligence.
Mr. Richard M. Roberts: Your Honor, I did not understand his argument to be that the receiver here would be personally liable for these acts.
I don't' think you would have a receiver to qualify under those circumstances.
I think people would shy away for the receivership.
If that's the outcome of this case, that it's -- he is to be personally liable, just like I think that if these are allowed as administration expenses, many attorneys are going to hesitate to tell other claimants or other would be claimants then suppliers and whatnot to do business in a Chapter XI arrangement, which is really the purpose of administration expenses or allowing them as administration expenses as to encourage them to do business with the bankrupt or the distressed business.
And if anyone who is a lawyer in private practice was approached by a supplier, was advised, “Should I extend credit to the trustee?”
He's going to have to consider then what are the possible limits of the damage claim if there may be and he'd have to consider the type of business and anything else because here, the people who would extend their credit and who have attempted to assist in rehabilitating the bankrupt are going to have to share pro rata if these are administration expenses.
And they would be penalized.
And I think that this Third Circuit of the lower court here were correct in denying these claims as priority claims.
Justice Abe Fortas: Excuse me, but let me see if I correctly understand your position.
Your position is that Chapter XI proceeding is pending, if the litigation has started on a tort claim prior to bankruptcy, the Chapter XI merging into a bankruptcy proceeding, then by virtue of 63 (a), that's provable, right?
That's point one.
Mr. Richard M. Roberts: Yes.
Justice Abe Fortas: Point 2, if Chapter XI and it goes on to the end, an arrangement among creditors, without any bankruptcy proceeding then hopefully the tort claim will be settled out whether or not a suit has been filed just by an informal arrangements among claimants, is that right?
Mr. Richard M. Roberts: Yes, Your Honor.
Justice Abe Fortas: If it is not settled out, this is third possibility, in the Chapter XI proceeding.
And if the Chapter XI proceeding does not merge into a bankruptcy or the next, if the litigation has not begun before bankruptcy, then the claim survives against the company as it immerges from the Chapter XI or straight bankruptcy proceedings.
In that event, until your position is and until -- at least until the trustee is discharged, a suit may be brought against the trustee.
Recovery may -- do you think be had on his bond?
That liability of the trustee may be established than that may -- a claim may thereby be asserted against the bankrupt estate?
Have I summarized that correctly or am I wrong?
Mr. Richard M. Roberts: Yes, Your Honor.
Although I believe that if he had presented his claim as a creditor in the arrangement proceeding, that he would be bound by that proceeding.
Justice Abe Fortas: Well, he wouldn't --
Mr. Richard M. Roberts: Now --
Justice Abe Fortas: He's just a claimant.
In my case, he had introduced his tort claim, the judgment.
Mr. Richard M. Roberts: Well, he's just a creditor.
It would not then -- I -- you've correctly summarized our position.
Yes, Your Honor.
May I just tell a moment to reply to --
Chief Justice Earl Warren: Of course you have a few moments to reply.
Mr. Richard M. Roberts: Thank you sir.
Actually, Justice Fortas, we did present our claim during the arrangement proceeding.
It was not until after these claims were presented.
Not -- It was not until May, this fire occurred in January; that the company went into bankruptcy and we considered that by presenting this claim, we were doing the equivalent, starting a suit.
Now, I would like to lie to rest the contention that we have a right, first of all, against the bankrupt.
I do not sincerely believe we could possibly have a claim because for six weeks, he had been out of control.
He had no control whatever over what was done in that building.
This was an engineer who was hired by the receiver and I do not see how we could hold the bankrupt responsible.
Now, our claim was, as I say presented before the bankruptcy occurred.
It has been expunged both as a general claim and as an administrative expense and we have -- we are now out of the bankruptcy proceeding unless the judgment is reversed.
We just simply had no standing whatever.
Now, as far as 63 (a) (7) is concerned, that appears at page 24 of our brief, this is the brief for petition and it says, “Debts of the bankrupt may be proved and allowed against this estate which are founded upon the following things.”
Now, if I am correct and I don't see how I can be wrong about the -- whether this is a claim against the bankrupt, if I am correct, then certainly, we have no claim under the Section 63 because this covers only “debts of the bankrupt”.
Now the only other place we have to go is cost and expenses of administration.
There is no other place.
For claims against the receiver which arise during the course of the arrangement or during the course of bankruptcy, and well I must confess that this action was started by my Brother, I didn't start this myself, and when I first heard that he had started a claim, this was expenses of administration, I had the same reaction that some of Your Honors have had to it that a $3,500,000 doesn't sound like an expense of administration.
But the more I have lived with this thing, I can't ask Your Honors, to spend the amount of time thinking about that I have.
But I am so sure that this can't be anything else.
There's no other place to go.
Justice Abe Fortas: Well, what about the other theory that's been discussed here this morning, that this is to say that this is a tort committed by the trustee, receiver trustee, that an action may be brought against him and that the recovery and it went to -- his liability is established, there -- recovery can be had and he has a claim over against the estate.
Mr. Richard M. Roberts: Well Your Honor, that is the law --
Justice Abe Fortas: Is that what you understand of defense just in here?
Mr. Richard M. Roberts: Well, I think that that is their contention, sir, yes but this is -- this has been the law of some states.
It was for example, the law of New York when Vass against Conron Brothers was decided.
But it is not as I understand the federal law.
This Court as -- long ago as I think 141 U.S. held that a receiver cannot be personally liable.
It was a rather old fashion than rather a devious method.
Justice Abe Fortas: Well, there are two things here.
One, that is to be personally liable and then a variant of that suggested by counsel for the Government that he could be sued and that a liability would be -- would then be after judgment was obtained against the trustee, a liability will then be the liability of the estate.
Mr. Richard M. Roberts: Your Honor, we --
Justice Abe Fortas: I must confess, I'm a little confused as to --
Mr. Richard M. Roberts: We have --
Justice Abe Fortas: -- precise meaning of these two --
Mr. Richard M. Roberts: We have cited a case at the end of our -- I think it's in our reply brief, which holds that the fact that you got a judgment in a separate action -- law, establishes only the amount of the damages but also that you have a claim against the tortfeasor but unless -- or if -- or some other type of claim.
But unless the claim which gave rise to the judgment is itself provable, the judgment is not provable by just automatically.
In other words, it doesn't -- we take the position that we have done the equivalent of suing by presenting this claim for - -- we of course, we have turned to the administrative expenses but it was expunged not only for that but under 63 (a) (7).
Now, the Government originally said, “Well, that's quite right” and then now they say, “Well, we could have sued under 63 (a) (7)” and as I hope I have demonstrated to Your Honors, I just don't believe that we have any such thing.
Justice Abe Fortas: Well, if the tort had at this part, it had occurred three days before the Chapter XI proceeding and no question with that -- it would have been a tort that would not -- there would've been a claim not provable in Chapter XI or subsequent bankruptcy.
Mr. Richard M. Roberts: And as we brought suit, that's correct, sir.
Justice Abe Fortas: Is that right?
Mr. Richard M. Roberts: That is correct --
Justice Abe Fortas: Unless you have brought suit before the petition was filed.
Mr. Richard M. Roberts: Well, as long -- I have always questioned whether 63 (a) (7) would stand up if somebody really wanted to give it to give it back.
Justice Abe Fortas: Alright, but that was -- that's what statute said, didn't it?
Mr. Richard M. Roberts: Yes, yes sir.
It says that.
Justice Abe Fortas: Now, so that the schemes of statutes are arguable as such you draw a line, you erect a Chinese wall at the date of the filing of the petition insofar as tort claims are concerned?
Mr. Richard M. Roberts: Yes.
Justice Abe Fortas: Now here, you have a tort that occurred during the period of the administration under Chapter XI and you are saying that the -- that does not -- that tort claim does not survive.
That's not a claim against the debtor as the debtor emerges from Chapter XI or from the subsequent bankruptcy proceeding.
Mr. Richard M. Roberts: That's my position exactly, sir.
Justice Abe Fortas: And you say that also you have no claim against the trustee personally?
Mr. Richard M. Roberts: That's correct.
Justice Abe Fortas: And that unless you have a claim against the assets, against the bankrupt or the debtor under Chapter XI that you have no recourse whatsoever?
Mr. Richard M. Roberts: That's exactly our positions here that we -- that these people -- we, and everybody that -- because we represent now, this whole $3,500,000 in claims.
If this case falls, nobody gets a nickel.
This is our position out of this estate.
There may be -- there's some insurance proceeds.
This is the first time I've heard that there was policy, which I think we would be entitled to.
Justice John M. Harlan: No, I haven't --
Mr. Richard M. Roberts: Well, the question, of course -- there would be a question as to whether the insurance covers the trustee.
I guess it does.
But at least -- we will sue the receiver on the grounds not that he personally did anything but that his agent was negligent.
That is our theory against the receiver.
Thank you very much, sir.