The Legacy of Reading Co. v. Brown Administrative Claims Arising from Trustee or DIP Misconduct

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Oct 2004

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Generally, a claim needs
to satisfy two requirements to be allowed as an administrative expense
under §503(b)(1)(A) of the Bankruptcy Code. First, it must arise from
a transaction with the estate. Second, the transaction should benefit the
estate in some way.<a href="#1" name="1a">1</a> If a claim satisfies these two requirements, it may
then qualify as an actual and necessary cost of preserving the estate and
be allowed as an administrative expense. Suppose, however, the trustee or
debtor-in-possession (DIP) commits a wrongful act. Logically, it
appears that while the aggrieved party may have a resulting claim,
administrative priority should not be allowed since no benefit was
conferred upon the estate.

This article will examine situations where the
trustee or DIP harms a claimant by either committing a tortious act or
omission, or otherwise engaging in misconduct. It will open with a
discussion of the Reading Co. v. Brown decision, which carves out an exception to the general rule
that administrative claims must derive from transactions that benefit the
estate. The article will examine the dual requirements that Reading administrative claims
must arise out of the operation of the debtor's business and must be
fundamentally fair. It will analyze the additional requirement that these
claims must originate post-petition. The discussion will conclude with an
overview of the various types of claims asserted under Reading, including claims for
attorneys fees, damages and awards resulting from labor and
employment-related disputes, fines and costs attributable to environmental
law violations and those arising under other miscellaneous theories.

<h4>Reading Co. v. Brown</h4>

The case of Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20
L.Ed.2d 751 (1968), was decided under the Bankruptcy Act. The facts of the
case are relatively straightforward. The impact of the decision, however,
has ramifications to the present day.

The debtor filed a petition for an arrangement under
chapter XI of the Act. On the same day, the district court appointed a
receiver. The debtor's business consisted merely of leasing its
primary asset—an office building. During the chapter XI arrangement,
the building was destroyed by a fire. The fire spread to adjoining
properties, causing damage to Reading Co. and other parties. The injured
parties applied for administrative expense claims. Subsequently, the debtor
was adjudicated to be a bankrupt, and the receiver was elected trustee in
bankruptcy. The trustee moved to expunge the claim of Reading Co., which
was entitled to first priority under §64a of the Act, former 11 U.S.C.
§104(a)(1), arguing that it was not an expense of administration. The
parties stipulated that the fire resulted from the chapter XI
receiver's negligence. The referee disallowed the claim. On appeal,
the district court and circuit court affirmed. The U.S. Supreme Court
reversed.

Section 64a of the Act, governing priority of claims,
set forth in subsection (1) as first priority claims "the costs and
expenses of administration, including the actual and necessary costs and
expenses of preserving the estate subsequent to filing the petition."<a href="#2" name="2a">2</a>
The Supreme Court framed the issue as "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." 391 U.S. at 476. Rejecting the
trustee's argument that negligence claims are not entitled to first
priority, the Court found that the statutory objective was "fairness
to all persons having claims against an insolvent."<a href="#3" name="3a">3</a> Id. at 477. The Court continued
by stating that "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." This in turn presented a
question—whether the injured claimant should be subordinated to,
share equally with or collect ahead of those creditors for whose benefit
the business was allowed to keep operating. Id. at 478. The Court concluded that it seems more
"natural and just" for those injured during the operation of a
business during an arrangement to recover ahead of those for whose benefit
the business was allowed to keep operating. Id. at 482. In support of this position, the Court
raised two points. First, if the receiver obtained adequate insurance
during the arrangement, the cost of the insurance itself would have
constituted an administrative expense. Second, torts of receiverships in
equity are traditionally allowed as claims in the nature of costs and
expenses against the receivership. Id. at 483-84. The Court concluded by holding 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." Id. at 484.

Reading survived congressional revisions to the Bankruptcy Code. As
stated by the court in In re Execuair Corp., 125 B.R. 600, 602-03 (Bankr. C.D. Cal. 1991):

<blockquote>
After the Reading decision, the Bankruptcy Code was completely revised and
Congress made no substantial changes in the definition of administrative
claim. Had they chosen to do so, Congress could have defined administrative
expense so as to overrule the Reading case.... In fact, it appears that they broadened the
concept of administrative expense claim by using the word
"including" to demonstrate that the subparts of §503(b)(1)
are examples and not limitations of what can be determined to be an
administrative claim.
</blockquote>

Indeed, Reading is alive and well to this very day. The following is
an analysis of those factors that are conditions to its application.

<h4>Claims Incident to Operation of Business and Fundamental Fairness</h4>

In order for a tort damage or other similar claim to
be accorded administrative priority, it should arise from the operation of
the debtor's business. If this requirement is met, courts often cite
fundamental fairness<a href="#4" name="4a">4</a> as a basis for allowance. If the claim does not arise
from the debtor's business operations, Reading will usually not apply.<a href="#5" name="5a">5</a> In In re Allen Care Centers Inc., 96
F.3d 1328, 1330-31 (9th Cir. 1996), the trustee closed a nursing home
previously operated by a chapter 7 debtor. This caused a state agency to
incur costs transferring residents to other facilities. The court held that
since these costs were not incident to operation of a business, the
administrative claim would be disallowed. In In
re Unidigital Inc., 262 B.R. 283, 289-90
(Bankr. D. Del. 2001), the debtor abandoned a printer that had to be
disassembled before it could be removed. Despite the fact that the landlord
had to absorb related costs, an administrative claim was not allowed. The
court noted that even if there was tortious conduct, it did not involve
conduct of the debtor's business. In In
re Franklin, 284 B.R. 739, 744-45 (Bankr. D.
N.M. 2002), the court refused to allow a medical expense as an
administrative claim because it did not arise out of the operation of the
debtor's business. Similarly, in In re
Bradley, 185 B.R. 7, 9 (Bankr. W.D.N.Y.
1995), the court held that unpaid alimony is not a claim that arises out of
the debtor operating as DIP and thus cannot be allowed as an administrative
expense.

If a party is damaged as the result of the operation
of a debtor's business during bankruptcy, the resulting claim will
often be allowed as an administrative expense as a matter of fundamental
fairness. In In re Charlesbank Laundry Inc., 755 F.2d 200, 203 (1st Cir. 1985), the debtor laundromat
filed for chapter 11 bankruptcy protection shortly after a state court
entered an order enjoining it from committing a nuisance. The bankruptcy
court granted stay relief, and the state court ordered that a civil
compensatory fine be entered against the debtor for violating the
injunction. The First Circuit ruled that the fine should be allowed as an
administrative expense as a matter of fairness. In Cumberland Farms Inc. v. Florida Dept. of Environmental
Protection, 116 F.3d 16, 21 (1st Cir. 1997), a
penalty imposed by a government agency for failure to follow
Florida's environmental laws was accorded administrative expense
status. The court held that it would be fundamentally unfair to allow the
debtor to flout environmental protection laws.<a href="#6" name="6a">6</a> In In re Healthco Intern. Inc., 272 B.R.
510, 513 (1st Cir. BAP 2002), a claimant incurred costs when it
successfully defended an action to set aside a pre-petition leveraged
buy-out as a fraudulent conveyance. The case was filed post-petition by the
chapter 7 trustee. The court held that despite the fact that the leveraged
buyout occurred pre-petition and that fundamental fairness did not apply,
the claimant's costs should nevertheless be allowed an administrative
expense. In doing so, it held that the express provisions of
§§503(b) and 507(a)(1) of the Code and 28 U.S.C. §1920<a href="#7" name="7a">7</a>
required allowance. In In re American
Preferred Prescription Inc., 218 B.R. 680,
688-89 (Bankr. E.D.N.Y. 1998), a debtor filed frivolous litigation against
the trustee's accountants post-petition to prevent them from being
paid for work performed. It was held that the accountants'
attorneys' fees were entitled to administrative priority as a matter
of fundamental fairness since the claimant suffered injury at the hands of
the debtor. However, in In re Sheridan, 187 B.R. 611, 613 (N.D. Ill. 1995), the court held
that fundamental fairness would not require elevating attorneys' fees
and related claims to administrative status when they stemmed from disputes
with LLCs controlled by the debtor and not directly from the debtor. No
piercing of the veil or alter-ego situation was presented, and no wrongful
acts were committed directly by the DIP.

The next group of cases address the requirement that
the claim must originate post-petition in order to qualify as an
administrative expense.

<h4>Pre-petition vs. Post-petition Claims</h4>

The cases generally hold that if claims arise
pre-petition, they are not entitled to administrative priority. The issue
of whether or not a claim arises pre-petition or post-petition for purposes
of applying Reading appears to be easily resolved on the surface. In practice,
however, the issue is sometimes more complex.

A good starting place is In
re Hemingway Transport Inc., 954 F.2d 1, 7 (1st Cir. 1992). The debtor
owned property prior to filing for bankruptcy. It initially filed under
chapter 11, but the case was later converted to chapter 7. The chapter 7
trustee filed an action to liquidate a Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) claim against the
debtor's landlord. The landlord successfully defended the action and
sought allowance of its attorney's fees as an administrative expense.
The court disallowed the claim on the ground that the subject litigation
had its origin in the debtor's pre-petition lease of the property and
not its post-petition operations under chapter 11.<a href="#8" name="8a">8</a> Another case with an
interesting twist is In re Continental Airlines
Inc., 148 B.R. 207, 213-16 (D. Del. 1992). The
claimant was an employee who was wrongfully terminated pre-petition, and
then reinstated post-petition. The court held that back-pay constructively
earned post-petition did not constitute an administrative expense. Since
the wrongful conduct took place pre-petition, the resultant claim did not
arise from the post-petition operation of the DIP's business, even if
the back pay itself was accrued post-petition. In Matter of Jartran Inc., 732 F.2d 584,
588-90 (7th Cir. 1984), the court held that an advertising agency that
arranged for the debtor's ads to appear in telephone directories was
not entitled to an administrative claim when the DIP did not pay. The
irrevocable commitment to place the ads was made before the filing of the
bankruptcy petition. The critical factor was the date of inducement of action on the part of
the debtor. In In re Emons Industries Inc., 220 B.R. 182, 194 (Bankr. S.D.N.Y. 1998), when a tort
committed by the debtor accrued pre-petition, the claimant's
application for an administrative expense was denied. Similarly, in In re Abercrombie, 139 F.3d
755, 758 (9th Cir. 1998), when a creditor initiated action on a real estate
contract pre-petition and was awarded attorneys' fees post-petition,
the court held that the fees claim was not entitled to administrative
priority.

The court in In re
Charlesbank Laundry, supra, took what appears
on the surface to be a different approach. The administrative claim, i.e., a civil fine for damages
based on a continuing nuisance in violation of an injunction, was allowed
in an amount equal to the post-petition portion of the fine. The wrongful
behavior commenced pre-petition, but continued post-petition. The
difference in Charlesbank, as opposed to the cases cited in the previous paragraph, is that
the wrongful conduct was continuing and deliberate in nature. 755 F.2d at
201-02. Along these lines, in In re Madden, 185 B.R. 815, 818-19 (9th Cir. BAP 1995), the debtor sued
the claimant pre-petition on a contract action. The debtor continued to
prosecute the case post-petition. The creditor ultimately prevailed and was
awarded attorneys' fees under the contract. The court held that the
claimant was entitled to an administrative claim for those fees that were
incurred post-petition. In the case of In re
Atlantic Container Corp., 133 B.R. 980,
991-92 (Bankr. N.D. Ill. 1991), the court held that the trustee's
failure to perform post-petition repairs to property that the estate
possessed gave rise to administrative claims. However, the court would not
apportion damage claims pre-petition and post-petition. It held that the
claimant only had an administrative claim for those damages that actually
arose post-petition.

In In re MTC Telemanagement Corp., 269 B.R. 44, 46-47
(Bankr. N.D. Cal. 2001), the trustee of an estate whose assets were
completely secured, at the request of the secured creditors, brought a
post-petition arbitration action against the debtor's principals. The
estate lost the litigation. The court held that this was an unusual
situation where the equities of a case warranted allowance of an
administrative claim for post-petition litigation over a pre-petition
contract. In In re Beyond Words Corp., 193 B.R. 540, 545-46 (N.D. Cal. 1996), the court held
that a potential claim for attorneys' fees incurred in arbitration
litigation initiated by a chapter 7 trustee over a pre-petition contract
would constitute an administrative expense.

<blockquote><blockquote>
<hr>
<big><center>
[W]hile Reading claims arise as a result of injuries suffered by the claimant at the hands of the trustee or DIP, they are not very different from other types of administrative claims.
</center></big>
<hr>
</blockquote></blockquote>

<h4>Application of Reading</h4>

(A) Attorney's Fees. Seven of the cases previously discussed
involved claims for attorney's fees that resulted from litigation
involving the bankruptcy estate.<a href="#9" name="9a">9</a> Courts allowed administrative claims for
attorneys' fees in In re Madden, In re Beyond Words Corp., In re MTC Telemanagement Corp. and In re American Preferred Prescription Inc. Applications for administrative expenses were disallowed in In re Hemingway Transport Inc.,
In re Abercrombie
and In re Sheridan.
Other cases are also worth noting.

In In re E.A. Nord Co.
Inc., 78 B.R. 289, 292 (Bankr. W.D. Wash.
1987), the court held that attorneys' fees and costs resulting from a
debtor's pursuit of a legally frivolous post-petition arbitration
constituted an administrative expense. In Execuair, supra, 125 B.R. at 604, the court held that attorneys' fees
awarded against an estate because of the trustee's post-petition
efforts to fight contempt proceedings constituted an administrative claim.
However, the Execuair decision was disapproved of by the Ninth Circuit in In re Kadjevich, 220 F. 3d 1016
(9th Cir. 2000) because the fees were rooted in a pre-petition case.

In In re Weinschneider, 2004 WL 524872 at 4 (N.D. Ill. 2004), the court provides a
good analysis. While Reading only applies to torts and other wrongful conduct, it does not
grant the right of an aggrieved party to attorneys' fees. The only
time that Reading can
form the basis of an attorney's fees claim is when a trustee
"initiates frivolous litigation."<a href="#10" name="10a">10</a> However, if the trustee
unsuccessfully initiates litigation during the course of his administration
of an estate, but does so in good faith, no administrative claim will lie.
As noted by the Weinschneider court, the Fifth Circuit in In re
Jack/Wade Drilling Inc., 258 F.3d 385, 388-89
(5th Cir. 2001), refused to grant administrative priority to an award of
attorneys' fees (pursuant to a contract) against the trustee where
the litigation, while unsuccessful, was initiated in good faith. The court
in In re White Rock Inc., 2002 WL 32114479, 3-4 (Bankr. E.D. Ark. 2002), took a
different approach. It disallowed an administrative expense claim of
attorneys' fees incurred to defend the debtor's claim of a
leasehold interest in real property. The court stated that the proper way
to remedy frivolous litigation is to apply for sanctions under Rule 9011.

(B) Labor and Employment
Disputes. As shown previously, issues sometimes
arise in labor and employment-related disputes.<a href="#11" name="11a">11</a> In In re Mammoth Mart Inc., 536 F.2d 950,
955 (1st Cir. 1976), the court was presented with an issue as to whether a
severance pay claim, which was determined by the length of a former
employee's service with the debtor company and which arose
post-petition from an employment termination, was entitled to
administrative priority. The court held that since the consideration for
the claim was supplied pre-petition, the claim was not entitled to
priority. In Yorke v. N.L.R.B., 709 F.2d 1138, 1144-46 (7th Cir. 1983), the trustee closed
the debtor's business. The NLRB determined that he violated labor
laws by failing to bargain after the business closed and that the estate
was liable for back pay to the debtor's former employees. The court
held that a limited back-pay order would constitute an administrative
expense. Conversely, in In re Palau Corp., 18 F.3d 746, 751 (9th Cir. 1994), the debtor had improperly
discharged employees pre-petition. Post-petition, an administrative law
judge found that the debtor had acted improperly. The NLRB then filed a
claim for back wages, claiming administrative priority instead of mere wage
priority. It argued that Reading applied because the debtor made no effort to reinstate the
employees. This argument was rejected by the court.

Several cases involve disputes over the Worker
Adjustment and Retraining Notification Act (WARN), 29 U.S.C. §2101 et seq. WARN requires employers,
in most cases, to provide notice to employees or their representatives
prior to implementing mass layoffs. The issues often turn on whether the
violation<a href="#12" name="12a">12</a> occurred pre-petition or post-petition. In In re Hanlin Group Inc., 176 B.R. 329,
334-35 (Bankr. D. N.J. 1995), the employer DIP failed to give a termination
notice to employees as required under WARN. The court determined that the
back pay awarded under WARN was deemed earned at the time of termination.
Since the requirement to provide notice took place post-petition, it was
held that WARN damages would be allowed as administrative expenses.
Following Hanlin, the
court in In re Beverage Enterprises Inc., 225 B.R. 111, 117 (Bankr. E.D. Pa. 1998), held that a
post-petition WARN violation, regardless of whether treated as wages or
damages, is entitled to administrative priority. However, in In re Jamesway Corp., 235
B.R. 329, 347-48 (Bankr. S.D.N.Y. 1999), when the DIP violated WARN by
failing to give its employees proper termination notice, their damages were
held to be general unsecured claims. The court rested its ruling on the
fact that the claims arose pre-petition.

(C) Fines Relating to
Environmental Disputes. Previously, it was
noted that in Cumberland Farms Inc., supra, the First Circuit allowed an administrative claim applied
for by a state agency for a post-petition penalty imposed for failure of
the DIP to comply with environmental laws. The Eleventh Circuit in In re N.P. Min. Co. Inc., 963
F.2d 1449, 1453-57 (11th Cir. 1992), upheld a similar application by the
Alabama Mining Commission, which assessed fines against the DIP for
post-petition environmental law violations. In In
re Wall Tube & Metal Products Co., 831 F.2d
118, 122 (6th Cir. 1987), the court held that Tennessee's claim for
cleanup of hazardous waste stored on the debtor's property was
entitled to administrative priority. It based its ruling on prior cases
that held that there was a special emphasis on protecting the public health
and safety. In In re Bill's Coal Co.
Inc., 124 B.R. 827, 829 (D. Kan. 1991), the
court held that to the extent penalties are assessed for post-petition
environmental misconduct, they should be allowed as administrative
expenses. In Leavell v. Karnes, 143 B.R. 212, 219-20 (S.D. Ill. 1990), it was held
that any fines, penalties or clean-up costs caused by the chapter 7
trustee's violation of environmental laws during operation of the
debtor's oil-producing properties would be allowed as administrative
claims.

A contrary ruling was handed down by the Third
Circuit in Pennsylvania Dept. of Environmental
Resources v. Tri-State Clinical Laboratories Inc., 178 F.3d 685, 690-93 (3rd Cir. 1999). The court held that it
would be unfair to grant an administrative claim arising from a criminal
fine as a result of post-petition behavior because it would ultimately be
the other creditors that would bear the cost of the fine. Also, the fine
would not compensate anybody for damages. The bankruptcy court in In re Lazar, 207 B.R. 668,
680-683 (Bankr. C.D. Cal. 1997), was faced with a case where property was
contaminated by gas stations pre-petition, and the contamination continued
post-petition, resulting in post-petition fines. The court declined to
grant administrative priority to the fines.

(D) Miscellaneous
Theories and Issues. While Reading involved a claim arising from
negligence, subsequent cases cover a wide range of types of misconduct. For
example, interest on claims arising from unpaid post-petition sales tax was
held to be entitled to administrative priority in In the Matter of Al Copeland Enterprises Inc., 991 F.2d 233, 240 (5th Cir. 1993). Courts have allowed
claims on various other theories as well.

Damage claims arising from the commission of
intentional torts by a trustee or DIP should be allowed as administrative
expenses if the other conditions discussed previously are satisfied.<a href="#13" name="13a">13</a> In In re UAL Corp., 297 B.R. 710,
720 (Bankr. N.D. Ill. 2003), the court held that injury caused by the
tortious misrepresentation of a DIP could give rise to an administrative
claim if the creditor suffered damages. In In
re Enron Corp., 2003 WL 1562201 at 4 (Bankr.
S.D.N.Y. 2003), the court held that a post-petition conversion is a type of
tort covered under Reading. Delivery of propane pursuant to a pre-petition agreement was
supposed to take place post-petition. An administrative claim arose
when a conversion took place under state law. In In re United Puerto Rican Food Corp., 41
B.R. 565, 572-73 (Bankr. E.D.N.Y. 1984), the DIP converted property in
which the Small Business Administration (SBA) had a lien. The court held
that in lieu of giving SBA an administrative claim, the SBA would be
entitled to proceeds from the converted property.

Claims for infringement of intellectual property
rights are also covered under Reading. In Carter-Wallace Inc. v.
Davis-Edwards Pharmacal Corp., 443 F.2d 867,
874 (2nd Cir. 1971), the Second Circuit stated that "[d]amages for
infringing a patent in the course of sales made for profit would seem an a fortiori case for
priority." In In re Cambridge Biotech
Corp., 186 B.R. 9, 14 (Bankr. D. Mass. 1995),
the court held that a post-petition patent infringement by the DIP would
give rise to an administrative claim. A similar ruling was reached in In re Dahlgren Intern. Inc.,
147 B.R. 393 (N.D. Tex. 1992). However, in In
re Houbigant Inc., 188 B.R. 347, 358-59
(Bankr. S.D.N.Y. 1995), the court held that a trademark infringement right
to an indemnification claim based on a license agreement signed
pre-petition was a general unsecured claim.

Another theory that has been successfully asserted
is unjust enrichment. In United Trucking Serv.
Inc. v. Trailer Rental Co., 851 F.2d 159,
161-62 (6th Cir. 1988), an equipment lessor rented trailers to the debtor. When the lease was rejected,
the debtor returned damaged trailers to the lessor. The Sixth Circuit held
that an administrative expense "should reflect actual value conferred
on the bankruptcy estate by reason of wrongful" conduct by the
debtor, who had been unjustly enriched. In In
re Prime Inc., 37 B.R. 897, 898-99 (Bankr. W.D.
Mo. 1984), the DIP used a secured creditor's collateral
post-petition. The court held that the creditor was entitled to an
administrative claim for depreciation of collateral, inter alia, to prevent unjust
enrichment.

Courts have held that applications for Reading administrative claims
must be made in a timely manner. In In re
Chicago Pacific Corp., 773 F.2d 909, 919 (7th
Cir. 1985), an application for an administrative claim filed on account of
alleged discrimination was held time-barred by laches. The claimants had
constructive notice and waited until seven years after the claim accrued,
on the eve of consummation of a reorganization plan, before filing claims.
In Elsom v. Woodward & Lothrop Inc., 1997 WL 476091 at 3-4, (E.D. Pa. 1997), the court held that
the creditor had administrative claims for torts committed post-petition by
the DIP and for its violation of the Fair Debt Collection Practices Act.
However, since the creditor failed to file his claim before the bar date,
the claim was barred.<a href="#14" name="14a">14</a>

<h4>Conclusion</h4>

Three general conditions (with occasional
exceptions) are required for allowance of Reading claims as administrative expenses. First, they must arise
from the operation of the debtor's business. Second, allowance of the
claims should be fundamentally fair. Third, they must originate or arise
post-petition. The cases show that the legacy of Reading extends beyond claims arising
from damages caused by negligence. Administrative claims for
attorney's fees, damages and awards in labor and employment disputes,
fines and costs in environmental-related disputes, along with damage claims
for intentional torts, patent, copyright or trademark infringement and
unjust enrichment have all been allowed in cases that follow Reading.

It has been said that Reading creates an exception to
the general rule that an administrative claim must derive from a
transaction that benefits the estate. However, while Reading claims arise as a result of
injuries suffered by the claimant at the hands of the trustee or DIP, they
are not very different from other types of administrative claims. Most
claims against an estate arise in some way as a result of an expenditure of
time, services, money or other property by the claimant. To varying
degrees, a direct benefit to the estate is conferred. Reading claims differ in that their
derivation is from an indirect benefit to the estate. In every situation
where a Reading
claim is allowed, the trustee or DIP has had the benefit of conducting
business operations under the protection of bankruptcy laws. This
presumably was done for the benefit of the estate's creditors. As a
practical matter, it is not unusual for creditors to suffer additional
losses as a result of post-petition business operations. Poor management by
a DIP or trustee can result in larger losses for creditors than actionable
negligence or other misconduct. It can be said that Reading-based claims, at the end of
the day, are really not so different from other administrative claims.
Simply said, they all merely represent the costs of doing business.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Collier on Bankruptcy,
¶503.06[3] at p. 503-25 (Alan N. Resnick, Henry J. Sommer, ed. 2004). <a href="#1a">Return to article</a>

<a name="2">2</a> The
language of §64a of the Bankruptcy Act is similar to that of
§503(b)(1)(A) of the current version of the Bankruptcy Code governing
allowance of administrative expenses. Section 503(b)(1)(A) provides that
"the actual, necessary costs and expenses of preserving the estate,
including wages, salaries or commissions for services rendered after the
commencement of the case," shall be allowed as administrative
expenses after notice and a hearing. Administrative expenses allowed under
§503(b) are accorded first priority under §507(a)(1). <a href="#2a">Return to article</a>

<a name="3">3</a> The Supreme
Court, in footnote 7, cites 28 U.S.C. §959(b), which requires trustees
and receivers to comply with state law when managing or operating property
in a cause pending in a U.S. court. However, the statute fails to specify
where claims arising from violations shall be collected. It further fails
to specify priority of claims that arise from violations. The statute is
still in force today and reads substantially the same as it did when Reading was decided. <a href="#3a">Return to article</a>

<a name="4">4</a> The Reading court failed to use
the word "fundamental" when discussing fairness. This language
was added in later decisions. <a href="#4a">Return to article</a>

<a name="5">5</a> The reader
should keep in mind that this is a general rule that has exceptions. See, e.g, infra, cases
involving allowance of attorney's fees as administrative expenses. <a href="#5a">Return to article</a>

<a name="6">6</a> Cf. Tri-State Clinical Laboratories, infra, which holds that allowing a criminal fine as an
administrative expense is not fair because the fine is not an award of
damages. Rather, it is punitive in nature. Allowing administrative priority
would be at the expense of other creditors. <a href="#6a">Return to article</a>

<a name="7">7</a> The
claimant's costs were awarded under this statute following a jury
trial. Section 507(a)(1) of the Code references fees and costs awarded
under chapter 123 of Title 28. Section 1920 of Title 28 is part of chapter
123. <a href="#7a">Return to article</a>

<a name="8">8</a> Also, the
trustee's action originated in the liquidation, not operation, of the
debtor's business. <a href="#8a">Return to article</a>

<a name="9">9</a> In re Healthco Intern. Inc., supra, addressed claims for litigation costs, not attorneys'
fees. <a href="#9a">Return to article</a>

<a name="10">10</a> Cf. Execuair, supra, where the
trustee's actions were defensive, not offensive. <a href="#10a">Return to article</a>

<a name="11">11</a> See supra, In re Continental Airlines Inc. <a href="#11a">Return to article</a>

<a name="12">12</a> The failure to provide required notice. <a href="#12a">Return to article</a>

<a name="13">13</a> The
conditions are that the claim arose out of the operation of the
debtor's business, that it is fundamentally fair and that it
originated post-petition. <a href="#13a">Return to article</a>

<a name="14">14</a> A harsh
decision in that notification of the bar date was given to the creditor by
publication. <a href="#14a">Return to article</a>

Journal Authors

Daniel Morman

Journal Date

Friday, October 1, 2004 - 12:00

Bankruptcy Rule

2004