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April 11, 1966

In the Matter of NORTH ATLANTIC AND GULF STEAMSHIP COMPANY, Incorporated, and Nortropic Shipping Company, Incorporated, Debtors

Frederick van Pelt Bryan, District Judge.

The opinion of the court was delivered by: BRYAN

FREDERICK van PELT BRYAN, District Judge.

In these Chapter X reorganization proceedings, the trustee has moved to deny priority to a non-tax claim of the United States in the sum of $138,916.58 for additional charter hire due from the debtor North Atlantic and Gulf Steamship Company, Incorporated on the ground that such a claim is not entitled to priority under Chapter X.

 The Government contends (1) that denial of priority at this time is barred by § 229(c) of the Bankruptcy Act since the Government's right to priority was vested by a plan of reorganization declared substantially consummated long before the trustee made this motion; (2) that the trustee is estopped to claim denial of priority; (3) that the trustee's motion should be denied as untimely in the exercise of discretion; and (4) that in any event the claim is entitled to priority pursuant to 31 U.S.C. § 191.

 These proceedings for reorganization were commenced in May 1958. The claim of the Government involved here asserting right to priority under 31 U.S.C. § 191 *fn1" was duly filed on April 29, 1959. The administration of the estate was complicated and protracted, and involved numerous litigated questions. After administration had been largely completed and partial distributions made to creditors, a plan of reorganization was duly confirmed by the court on September 19, 1962.

 The plan provided, in part, that "all tax and other claims of the United States, * * * shall be paid in full in cash in such amounts as shall finally be determined by settlement, litigation or otherwise, and if not so determined prior to the consummation of the Plan, shall be provided for by the creation of a cash reserve therefor or by the payment into the registry of the Court for an amount equal to the total of such claims."

 The plan further provided for a realization corporation to liquidate the debtor's slow assets and the general creditors became stockholders entitled to share pro rata in the proceeds.

 On December 26, 1962 an order was entered under § 229(b) of the Bankruptcy Act declaring that the plan had been substantially consummated.

 The Government's claim involved here was for additional charter hire on charters of Government vessels by the debtor made through the Maritime Commission due and owing to the United States under the rather complicated provisions of the Merchant Ship Sales Act of 1946, 50 U.S.C.App. §§ 1735-1746, and incorporated provisions of the Merchant Marine Act of 1936, 46 U.S.C. §§ 1198-1200. The claim was a phase of a continuing controversy between the debtor and the Government as to whether the Government was entitled to additional payments, or refunds of overpayments were due to the charterers. Suits by the debtor against the Government involving these same questions had been pending in this court for several years at the time of reorganization. A number of cases by other parties involving these questions were also pending in this and other districts.

 In June 1961 the trustee moved to disallow the Government's claim in its entirety on the ground that there were no sums due and owing for charter hire from the debtor to the Government. The Government then cross-moved to increase its claim by some $7,450,000.

 On July 28, 1961 both the trustee's motion for disallowance of the Government's claim and the Government's motion to increase the amount came on to be heard before me. Trustee's counsel opposed the motion for increase primarily on the ground that it was untimely and that to grant it would disrupt the orderly administration of the estate and would unduly delay settlement and distribution. The motion to increase the claim was thereupon denied from the bench.

 Resolution of the substantive questions raised by the trustee's motion to disallow the claim in its entirety was dependent on the outcome of the pending litigation in this and other courts posing similar questions. For this reason, decision on the trustee's motion to disallow was held in abeyance with the concurrence of all parties until the final determination of these issues in the pending cases. In Massachusetts Trustees of Eastern Gas & Fuel Associates v. United States, 377 U.S. 235, 84 S. Ct. 1236, 12 L. Ed. 2d 268 decided on May 25, 1964 these issues were finally determined adversely to the trustee's contentions. The trustee then conceded the validity of the Government's claim, reserving only some complicated problems of cumulative accounting as to the precise amount due which are still in process of resolution by negotiation between the trustee and the Government.

 In the meantime the plan of reorganization had been proposed, approved, confirmed and, in December 1962, declared substantially consummated.

 The trustee consistently took the position throughout these reorganization proceedings, and until more than two years after the plan of reorganization had been declared substantially consummated, that the Government's claim for $138,916.58, if valid, was entitled to priority. In an affidavit and memorandum of law dated as early as April 19, 1961, on his application for retention of special counsel to represent the trustee in its controversies with the Government, trustee's counsel conceded that the Government was entitled to priority under 31 U.S.C. § 191. This was also confirmed in the course of the argument and briefs on the motions to disallow the Government's claim and the Government's cross-motion to increase.

 By March 1962 the trustee had completed proceedings for disallowance of priority to a number of large claims asserted against the estate by governmental authorities. Yet no objection was ever raised to the ...

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