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IN RE REA EXPRESS

December 21, 1977

IN RE REA EXPRESS, INC., Bankrupt, ST. PAUL FIRE & MARINE INSURANCE COMPANY, Plaintiff-Appellee,
v.
REA EXPRESS, INC., Defendant-Appellant.



The opinion of the court was delivered by: GRIESA

GRIESA, J.

This appeal raises the legal issue whether, in an arrangement under Chapter XI of the Bankruptcy Act, workmen's compensation payments on behalf of the debtor in possession to employees injured before the commencement of the arrangement proceeding are "costs and expenses of administration" under § 64a(1) of the Bankruptcy Act, 11 U.S.C. § 104(a)(1). This Court reverses the decision of the Bankruptcy Court, Hon. John J. Galgay, and holds that they are not.

Defendant REA commenced a Chapter XI proceeding on February 18, 1975. It operated its business as debtor in possession until November 6, 1975, when it was adjudicated a bankrupt.

 The present appeal involves workmen's compensation liabilities of REA arising out of injuries sustained by REA employees *fn1" during the period 1954-1961, when REA was a self-insurer. REA became liable to make periodic compensation payments and in the cases in question the benefits were still due into the period of the Chapter XI proceeding.

 Plaintiff St. Paul Fire & Marine Insurance Co. is a surety with respect to the REA compensation liabilities in issue. Since late 1974 REA has defaulted on its compensation obligations, at least as to the claims involved in this action. Thus the compensation payments made during the period of the Chapter XI proceeding were made by St. Paul on behalf of REA.

 St. Paul now sues REA asserting that it is subrogated to the rights of the compensation beneficiaries. Further, St. Paul contends that compensation liabilities of REA during the period of the Chapter XI proceeding should be treated as costs of administering the debtor's estate.

 The Decision Below

 This action was commenced on June 16, 1975. St. Paul's complaint requested the Bankruptcy Court to enter an order (1) directing REA to reimburse St. Paul for all compensation payments made during the Chapter XI proceeding; and (2) directing that REA itself make all future compensation payments.

 Judge Galgay handed down his decision March 3, 1976. Judge Galgay sustained the first claim, and held that St. Paul should be reimbursed for compensation payments made during the Chapter XI proceeding and that such reimbursement was entitled to priority as "costs and expenses of administration" under Section 64a(1) of the Bankruptcy 'Act. This ruling is challenged on appeal. The judge denied the second claim -- for an order compelling REA itself to make further compensation payments -- as moot, since REA had been adjudicated a bankrupt on November 6, 1975.

 Judge Galgay considered that the initial question for determination was "whether REA was obligated during the period in which it was a debtor-in-possession to pay the Workmen's Compensation awards in question." Although finding no express statutory or case law authority on the point, the judge held that equity required that REA should be continually liable for the periodic compensation payments and that it would be inequitable to treat such obligations as ordinary debts which are held in abeyance during the pendency of the Chapter XI proceeding. The judge cited two cases, Bowen v. Hockley, 71 F.2d 781 (4th Cir. 1934), and In re New York State Rys., 16 F. Supp. 717 (N.D.N.Y. 1936). *fn2" The judge recognized that these involved federal equity receiverships, rather than Chapter XI or bankruptcy proceedings, but held that their views on the equitable requirements of continuing workmen's compensation payments during receivership apply equally to a Chapter XI proceeding. He further held that REA's liability for continued compensation payments should be treated as "costs and expenses of administration" under Section 64a(1) of the Bankruptcy Act.

 Judge Galgay went on to hold that, since St. Paul had made the compensation payments on REA's behalf, it was subrogated to the rights of the compensation claimants, and was entitled to file a claim for priority payment under Section 64a(1).

 Discussion

 Section 64a(1) *fn3" accords the first priority in bankruptcies and arrangements to "the costs and expenses of administration, including the actual and necessary costs of preserving the estate subsequent to filing the petition." "Where priorities under § 64 are in issue, a strict construction must be placed thereon and the burden falls on those asserting a priority to establish that they come within the intended class." 3A Collier on Bankruptcy [*] 64.02[6] (14th ed. J. Moore 1975). See Goldie v. Cox, 130 F.2d 690, 693 (8th Cir. 1942).

 Collier describes costs and expenses of administration in terms which emphasize that they basically relate to liabilities arising ...


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