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In the Matter of the PUSEY AND JONES CORPORATION, Bankrupt. Deemer Steel Casting Company, a Delaware Corporation, Appellant

United States Court of Appeals for the Third Circuit1961-10-24No. No. 13617
295 F.2d 479

Summary

Holding. The court affirmed the district court's judgment, holding that the six months' rule does not apply to claims arising from supplies furnished to a private manufacturing corporation and that creditors cannot be accorded preferred administrative expense status based on judge-made doctrine when the bankruptcy statute establishes a specific order for distributing a bankrupt's estate.

Deemer Steel Casting Company supplied materials to Pusey and Jones Corporation during the six months before bankruptcy proceedings and sought priority status for its claim as an administrative expense, arguing that the supplies were essential to the bankrupt's operations. Deemer relied on the 'six months' rule,' a judge-made doctrine originating from Supreme Court railroad reorganization cases that granted preferred treatment to suppliers of essential goods and services. The court rejected this argument, finding that the rule's historical application to public service railroads does not justify extending it to private manufacturing businesses, and that allowing such priority would improperly create a new class of preferred creditors outside the statutory framework established by the bankruptcy laws.

Summary generated by law.co from the public-domain opinion. The opinion text itself is public domain.

Key issues

  • Whether the six months' rule applies to private businesses or only public service corporations
  • Whether judge-made bankruptcy law can create new classes of preferred creditors
  • Whether suppliers of essential goods during pre-bankruptcy operations deserve priority treatment

Procedural posture

The case was appealed from a district court judgment in a bankruptcy matter following adjudication of the corporation as bankrupt.

Authorities cited

No cited authorities resolved to law.co cases yet.

Opinion

majority opinion

GOODRICH, Circuit Judge.

This is an appeal from the judgment of the District Court for the District of Delaware in a bankruptcy matter. The bankrupt admittedly owes a sum of money to the Deemer Steel Casting Company, appellant, for supplies furnished the bankrupt during a period of six months before the institution of proceedings under Chapter XI. These supplies were incorporated into machinery and equipment manufactured by the bankrupt and were necessary to the continued operation of its business. There is no dispute as to the value of the merchandise so furnished.

No plan of reorganization was ever submitted under the Chapter XI proceedings and, on January 27, 1960, the Pusey and Jones Corporation was adjudicated a bankrupt. Appellant contends that its claim is entitled to outrank those of both secured and general creditors and to be classed as an expense of administration.

The claim of Deemer is based on what is sometimes called the “six months’ rule.” This rule, first applied by the Supreme Court in a railroad reorganization case, allowed preferred treatment for creditors who, during the six months before reorganization proceedings, had supplied the railroad with merchandise essential to its operation. Fosdick v. Schall, 1878, 99 U.S. 235, 25 L.Ed. 339.

Two things are to be noted in this connection. The first is that the creditors to whose advantage this rule operated were supplying a public service corporation. Second, reorganization in railroad eases carries with it, as an end in view, the continued operation of the public service facilities. The rule, however, is a piece of judge-made law and is not based upon any provision of the bankruptcy or reorganization statutes. The question in this case is whether this rule which started as one having to do with a railroad is to be applied to a private business. The district court said no in a thoroughly considered opinion and in spite of references to Remington and Collier, both of which do not limit the rule to public service reorganization cases. 6 Collier, Bankruptcy § 9.13, at 2852-55 (14th ed. 1947); 11 Remington, Bankruptcy § 4535 (rev. ed. 1961). See 1961, 192 F.Supp. 233.

The appellants rely heavily upon the Second Circuit case of Dudley v. Mealey, 1945, 147 F.2d 268. This case involved the reorganization of a hotel, which perhaps could be called a company affected with the public interest; innkeepers were certainly so regarded at common law. Also, the case came up on objection to a reorganization plan and what the court held was that it was not fatal to the plan to put the creditors who had supplied essential goods and services to the hotel in the preferred position asked for by appellants here. It must be said, however, that the language of the court’s opinion goes a long way to support Deemer’s claim. 147 F.2d at page 271. See, however, In re Warner Coal Corp., D.C.N.D.W.Va., 83 F.Supp. 961, affirmed sub nom. Wheeling Elec. Co. v. Mead, 4 Cir., 1949, 177 F.2d 718.

If Deemer’s claim is to be upheld for this highly desirable position, any creditor who furnishes goods on credit to, for example, a grocery or drug corporation would be entitled to the same advantage. It is true that Pusey and Jones used these castings to supply customers with whom they had contracts and that the material thus furnished helped keep the business going. But that could also be true of the jobber who supplies merchandise to the grocery or drug store. Each must have new supplies to continue as a going concern. We would then have an entirely new class of preferred creditors, namely, those who supply goods to a failing corporation in order to keep it going during the six months prior to reorganization proceedings. And this result would apply with equal force, according to the argument for the appellant, whether the reorganization proceedings are successful or whether the corporation, failing to get a successful reorganization, moves into bankruptcy.

We do not think that this is a good result. The bankruptcy statute has specific provisions concerning the order in which claims are arranged for distribution of a bankrupt’s estate. We think it is undesirable to create a new class of creditors by judge-made rules which would transcend the provisions carefully worked out in the bankruptcy act. If a new class of preferred creditors is to be established it should be done by* the statute and not by ourselves.

The judgment of the district court will be affirmed.

. Other eases in which the Supreme Court has applied the same rule include Southern Ry. Co. v. Carnegie Steel Co., 1900, 176 U.S. 257, 20 S.Ct. 347, 44 L.Ed. 458; Virginia & Alabama Coal Co. v. Central R. R. & Banking Co., 1898, 170 U.S. 355, 18 S.Ct. 657, 42 L.Ed. 1068; Burnham v. Bowen, 1884, 111 U.S. 776, 4 S.Ct. 675, 28 L.Ed. 596; Hale v. Erost, 1879, 99 U.S. 389, 25 L.Ed. 419. Some lower federal courts have extended the rule to other types of “public” corporations. See In re Madison Rys. Co., 7 Cir., 1940, 115 F.2d 586 (street railway); Crane Co. v. Fidelity Trust Co., 9 Cir., 1916, 238 F. 693, certiorari denied 1917, 244 U.S. 658, 37 S.Ct. 744, 61 L.Ed. 1375 (electric railway, light and water company); Keelyn v. Carolina Mut. Tel. & Tel. Co., C.C.D.S.C.1898, 90 F. 29 (telephone and telegraph company); Atlantic Trust Co. v. Woodbridge Canal & Irrigation Co., C.C.N.D.Cal.1897, 79 F. 39 (irrigation company). For a more complete listing, including cases in which the rule’s application has been denied, see FitzGibbon, The Present Status of the Six Months’ Rule, 34 Colum.L.Rev. 230, 233 n. 8 (1934).

. As District Judge Leahy put it: “[T]he public consensus does not equate a railroad for commuting [to] suburbia with a company manufacturing card tables and bridge lamps.” In the Matter of Pusey & Jones Corp., D.C.D.Del.1961, 192 F.Supp. 233, 236 n. 13.

. See, e. g., 11 U.S.C.A. §§ 93, sub. h (secured creditors), 104 (debts which have priority and their order of payment), 105 (dividends).