## Facts

- I. J. Knight Realty Corporation filed for a Chapter XI arrangement, and the court appointed Francis Shunk Brown as receiver to operate the debtor’s business, which primarily involved leasing an industrial building.
- While the receiver was operating the property, a fire destroyed the building and spread to adjacent premises, causing substantial damage to Reading Company and others.
- Reading filed a negligence-based claim against the receiver and sought treatment of the claim as an administrative expense; numerous similar tort claims were filed, exceeding the estate’s assets.
- The Chapter XI proceeding was later converted into bankruptcy, and Brown became trustee.
- For purposes of resolving priority, the parties stipulated that the fire-related damages resulted from the negligence of the receiver and a worker he employed while acting within the receiver’s authority.

## Issues

1. Whether tort damages caused by a court-appointed receiver’s negligence in operating the debtor’s business qualify as “actual and necessary” costs and expenses of administration entitled to first priority under Bankruptcy Act § 64a(1).
2. Whether Bankruptcy Act § 63a(7) limits such tort claims to general, nonpriority treatment in the subsequent bankruptcy.

## Decision

- The Supreme Court reversed.
- The Court held that negligence damages arising from the receiver’s court-authorized operation of the business are “actual and necessary” costs of administration and therefore receive first-priority treatment under § 64a(1).
- The Court rejected the view that administrative priority is limited to expenses necessary to induce voluntary dealing with the estate.
- The Court rejected the argument that § 63a(7) forecloses administrative-expense treatment for these post-petition, operations-based tort claims.

## Legal Principles

- When an estate is operated under court authority, tort liabilities arising from negligent operation are treated as costs of doing business and may constitute “actual and necessary” administrative expenses under Bankruptcy Act § 64a(1).
- Administrative-expense priority may rest on fairness between claimants; involuntary tort victims of estate operations may be entitled to protection comparable to, or greater than, voluntary creditors.
- The existence of statutory provisions governing proof of certain tort claims as general claims does not bar classifying post-petition tort liabilities as administrative expenses when they arise directly from the estate’s authorized operations.

## Conclusion

The Court held that tort damages caused by a receiver’s negligent, court-authorized operation of the debtor’s business are first-priority administrative expenses, requiring the estate to bear those losses ahead of general creditors.


Reading Co. v. Brown, 391 U.S. 471 (1968)