Sec. 77. How A Claim Having Priority Differs From A Secured Claim

A claim having priority differs from a secured claim in this, that it is the claim of an unsecured creditor to which the law gives priority to the claims of other general creditors.

A secured claim is one by virtue of which a claimant has a right upon certain particular property on account of his contract, as a mortgagee, pledgee, etc. A claim having priority is one which the bankruptcy law says shall be paid before other claims are paid. Claims having priority do not have priority to secured claims or to claims which give a valid lien on the bankrupt's property. The law sets up that certain claimants shall be paid in full before dividends shall be paid on claims not having priority.

155. As to right of Bankruptcy Court to sell the secured prop-perty not subject to the lien, and to attach the lien to the proceeds. see Sec 60 (8).

Sec. 78. What Claims Have Priority

The Act sets out the different classes of claims which have priority, as noticed below.

Keeping in mind the meaning of the word priority as used in the bankruptcy law, i.e., that it differs from the term secured claim, or lien claim, the law provides that the following claims shall have priority in the order named, that is, the claims in one class must be paid in full before claims of a later class are paid, or before dividends upon claims not having priority are paid.

(1) "The actual and necessary cost of preserving the estate subsequent to filing the petition."

These are the claims that have the first priority and are to be paid in full before any other claims are paid.

(2) "The filing fees paid by creditors in involuntary cases, and, where property of the bankrupt, transferred or concealed by him either before or after filing the petition, shall have been recovered for the benefit of the estate of the bankrupt by the efforts and the expense of one or more creditors, the reasonable expenses of such recovery."

These are second in priority.

(3) "The costs of administration."

This to include the fees and mileage payable to witnesses, and one reasonable attorney's fee for professional services rendered to petitioning creditors in involuntary cases, and to the bankrupt in voluntary cases.

These come next in order of priority and after the classes above are paid in full, are to be paid in full before the classes following are paid.

(4) "Taxes legally due and owing by the bankrupt to the United States, state, county, district, or municipality."

The law before it enumerates the classes having priority states that the court shall order the trustee to pay taxes before dividends to creditors are paid. Some doubt has arisen as to the place of taxes in the order of priority. They seem to fall at this point, i. e. after expenses of administration and fees and costs paid out by creditors.156

(5) "Wages due workmen, clerks, traveling or city salesmen, or servants which have been earned within three months before the date of the commencement of the proceeding not to exceed $300 to each claimant."

These constitute the next class and if any funds remain after satisfying the previous priorities, these are entitled to be paid in full before general creditors can receive dividends, or share pro rata if the funds are insufficient to pay in full.

The word "wages" refers to compensation paid one who works for hire.

It would not include a manager of a business,157 as he could hardly be said to be working for wages. Travelling or City Salesmen are entitled to priority, whether working on commission or not.158

156. In re Jacobson, (C. C. A. 7th Cir.) 263 Fed. 883. City v. Bird, 249 U. S. 174.

157. In re Bonk, (D. C. Mich.) 270 Fed. 657.

158. In re Dexter (C. C. A. 1st Cir.) 158 Fed. 788.

The fact that the claim has been reduced to judgment does not destroy its priority.159

(6) "Debts owing to any person who by the laws of the states or the United States, is entitled to priority."

Next and last of claims having priority are those which have priority by the law of the state, or of the United States. A state priority however will not govern if priority is provided for the same class of claim by the laws of the United States. Thus if a state law should give priority to wage earners for a period of six months, or for a greater amount, the bankruptcy law would govern.160

If a debt is due the United States it has priority by virtue of this section, as for instance against a surety on a bond given to secure performance of contracts with the United States.161

So a debt due the State which by the law of that state is entitled to priority, has priority under this provision.162 And whether the state has such priority is determined by the decisions of that state, and such decisions will be accepted by the federal courts.163