Manhattan Properties v. Irving Trust Company/Opinion of the Court

These cases present the question whether a landlord may prove in bankruptcy for loss of rents payable in the future, where the claim is founded upon the bankrupt's covenant to pay rent, and, in the alternative, upon his breach of a covenant that, in event of bankruptcy, the landlord may re-enter, and, if he does, the tenant will indemnify him against loss of rents for the remainder of the term.

In No. 505 it appears that Oliver A. Olson Co., Inc., was the lessee of premises for a term of nine years and eight months beginning February 1, 1928, and expiring October 1, 1937. Defaults in payment of rent due February and March, 1932, were followed by an involuntary proceeding in which the company was, on March 18, 1932, adjudicated a bankrupt. The total rent reserved for the portion of the term subsequent to bankruptcy was $58,000, and, as the claimant asserted, the present rental value of the leased premises for the remainder of the term was $33,000. The lessor filed its claim, one item being damages for loss of future rentals, which it asked to have liquidated at $25,000, the difference between the rent reserved and the present rental value.

The lease contained a covenant that, if the tenant should default in the payment of rent, or abandon the premises, or if they should become vacant, the tenant become insolvent, or make an assignment for the benefit of creditors, or if bankruptcy proceedings should be instituted by or against the tenant, the landlord might without notice re-enter the premises; and, after obtaining possession, relet as agent for the tenant, for the whole or any part of the term, and from time to time, and:

'The Tenant further agrees to pay each month to the Landlord the deficit accruing from the difference between the amount to be paid as rent as herein reserved and the amount of rent which shall be collected and received from the demised premises for such month during the residue of the term herein provided for after the taking possession by the Landlord; the overplus, if any, at the expiration of the full term herein provided for shall be paid to the Tenant unless the Landlord within a period of six months from the termination of this lease as provided herein shall, by a notice in writing, release the Tenant from any and all liability created by this provision of the lease, which it is agreed the Landlord shall, at the Landlord's option, have the right to do, in which event it is agreed that the Landlord and the Tenant shall have no further rights and liabilities hereunder.'

The referee expunged so much of the claim as sought damages for loss of future rents, holding that it did not constitute a provable debt. The District Court and the Circuit Court of Appeals were of the same opinion.

In No. 506 premises owned by the petitioners were held by the bankrupt under a lease dated June 14, 1920, for a term to expire June 30, 1945. There was a covenant that, on default by the lessee, or if it should be adjudicated a bankrupt, the lessor might enter and repossess the premises, ' * *  * and upon entry as aforesaid this lease shall determine, and the Lessee covenants that in case of such termination it will indemnify the Lessor against all loss of rent which the Lessor may incur by reason of such termination, during the residue of the term above specified.'

A voluntary petition was filed and an adjudication entered August 29, 1932. November 23, 1932, the trustee disaffirmed the lease, and three days later the lessors took possession and proceeded to collect rents from the occupants of the demised premises; and January 13, 1933, they filed a proof of claim which as amended included an item of $4,404.40, representing the difference between the rent accrued to the date of re-entry and the collections from occupants during that period, and an item of $14o,615.80, representing the difference between the alleged rental value for the remainder of the term after re-entry and the rent reserved in the lease. Petitioners made application for liquidation of their claim under section 63b of the Bankruptcy Act 11 USCA § 103(b). The trustee moved to have the claim expunged and disallowed. The referee disallowed both items, and his action was affirmed by the District Court and the Circuit Court of Appeals.

The controversy hinges upon the interpretation of the following sections of the Bankruptcy Act:

'Sec. 63. Debts which may be proved. (a) Debts of the bankrupt may be proved and allowed against his estate which are (1) a fixed liability, as evidenced by a judgment or an instrument in writing, absolutely owing at the time of the filing of the petition against him, whether then payable or not, with any interest thereon which would have been recoverable at that date or with a rebate of interest upon such as were not then payable and did not bear interest; * *  * (4) founded upon an open account, or upon a contract express or implied. * *  *

'(b) Unliquidated claims against the bankrupt may, pursuant to application to the court, be liquidated in such manner as it shall direct, and may thereafter be proved and allowed against the estate.'

'Section 1. (11) 'Debt' shall include any debt, demand, or claim provable in bankruptcy.'

'Sec. 17. A discharge in bankruptcy shall release a bankrupt from all of his provable debts. * *  * '

A majority of the Circuit Court of Appeals felt bound to follow its earlier decision In re Roth & Appel, 181 F. 667, 31 L.R.A.(N.S.) 270, which denied a landlord's right to prove a claim for future rents arising under a similar lease. The view there expressed was that the occupation of the land is the consideration for the rent, and, if the right to occupy terminates, the obligation to pay ceases; and the covenant to pay rent creates no debt until the time stipulated for payment arrives. Since many events may occur which will absolve the tenant from further obligation for rent, the claim is said to be too contingent, both because of the uncertainty at the date of adjudication that the lessor will re-enter, and the doubt as to his suffering loss of rent if he should re-enter.

In the present case, one of the judges of the Court of Appeals held that Maynard v. Elliott, 283 U.S. 273, 51 S.Ct. 390, 75 L.Ed. 1028, has settled the provability of claims contingent in the sense that no sum is presently payable, thus destroying the principal ground of decision in Re Roth & Appel, and that the estimation of the present worth of payments to be made in the future is no obstacle to the proof of a claim based upon an anticipatory breach. Central Trust Co. v. Chicago Auditorium Association, 240 U.S. 581, 36 S.Ct. 412, 60 L.Ed. 811.

The petitioners say the provability of claims for future rent is a subject on which the lower federal courts have been in disagreement. They argue that a claim for rent is founded upon a lease which is an express contract within the words of section 63a(4), 11 USCA § 103(a)(4). They rely upon the purpose of the Bankruptcy Law to bring in all contract creditors and to discharge all debts of the bankrupt, so that he may start afresh unembarrassed by old indebtedness, and point to the hardship to an individual bankrupt of not discharging claims for rent which might well prevent his financial rehabilitation, and the unfairness to the landlord of a corporate bankrupt who, under the decision below, cannot prove upon his lease along with other creditors, but must look solely for redress for loss of future rents to a corporate debtor whom bankruptcy has stripped of all assets.

The respondent asserts a substantial difference between rent and other kinds of indebtedness, and presents equitable considerations thought to weigh in its favor, but especially stresses the legislative history of the bankruptcy laws passed by Congress, and insists that the preponderant construction of them by the courts excludes claims for future rents from the class of provable debts.

The issue is not one of power, for plainly Congress may permit such claims or exclude them. The sole inquiry is the intent of the act. The construction for which the petitioners contend is, as a matter of logic, an admissible one. But that construction is contrary to the great weight of authority as to the effect of similar provisions in earlier acts, and section 63 of the present act.

In England such claims were not provable under the Act of 7 Geo. I, c. 31; Mayor v. Steward, 4 Burr. 2439; and a discharge could not be pleaded in defense of an action for rent accruing subsequent to bankruptcy. Boot v. Wilson, 8 East, 311. The landlord's claim for loss of future rent was made provable by the Act of 32 and 33 Vict., c. 71, § 23 (1869), and more explicit provisions to the same effect were embodied in that of 46 and 47 Vict., ch. 52, §§ 37 and 55 (1883).

The act of Congress, approved April 4, 1800, permitted proof of a limited class of contingent claims, but did not mention rents. Apparently the latter were not considered provable debts under that statute. Hendricks v. Judah, 2 Caines (N.Y.) 25, 2 Am.Dec. 213; Lansing v. Prendergast, 9 Johns.(N.Y.) 127.

The Act of August 19, 1841, § 5, 5 Stat. 440, 444, expressly allowed proof of contingent claims, specifying certain classes and adding a general description of contingent debts, but said nothing about rent. The courts held that the latter was not a provable debt within this section, because neither a present debt nor a contingent claim susceptible of liquidation. Bosler v. Kuhn, 8 Watts & S.(Pa.) 183; Stinements v. Ainslie, 4 Denio (N.Y.) 573; Savory v. Stocking, 4 Cush. (Mass.) 607.

The Act of March 2, 1867, § 19, 14 Stat. 517, 525, authorized the proof and liquidation of contingent claims and also proof of a claim for a proportionate part of any rent up to the date of bankruptcy. The courts uniformly held that claims for future rent or for damages for breach of covenant to pay rent were not provable under the act, though differing as to the reason; some holding them not contingent claims within the statutory definition, and others thinking the express permission of proof for rent past due at the date of bankruptcy impliedly excluded claims for rents thereafter falling due. Ex parte Houghton, Fed. Cas. No. 6,725; Ex parte Lake, Fed. Cas. No. 7,991; In re Croney, Fed. Cas. No. 3,411; In re Commercial Bulletin Co., Fed. Cas. No. 3,060; In re May, Fed. Cas. No. 9,325; In re Hufnagel, Fed. Cas. No. 6,837; Bailey v. Loeb, Fed. Cas. No. 739.

In the year 1880, Circuit Judge John Lowell, of Massachusetts, at the suggestion of several mercantile associations, drafted a proposed bankruptcy law, which, after revision, was introduced in Congress, but failed of passage. It contained a section (60) which allowed proof of damages suffered by a landlord by reason of the trustee's rejection of a lease, and another (61) permitting any creditor to compel the trustee to elect to accept or decline any lease, and upon declination the landlord was to have 'any damages he shall suffer thereby assessed, as the court shall direct, and prove the amount as a debt in the bankruptcy.'

After much agitation by trade associations and commercial bodies, and after prolonged consideration (see Schall v. Camors, 251 U.S. 239, 250, 40 S.Ct. 135, 64 L.Ed. 247), Congress adopted the act now in force, that of July 1, 1898. The committee reports do not disclose the origin of the phraseology of section 63 (11 USCA § 103), nor discuss the classes of claims intended to be included. But it is clear that Congress was familiar with analogous sections of the earlier acts and the court decisions interpreting them, and with the test of the Lowell Bill and the English act then in force. In view of the extended consideration and discussion which preceded the passage of the act, the failure to include a provision for claims for loss of rent or for damages consequent on the abrogation of leases is significant of an intent not to depart from the precedents disallowing them. Schall v. Camors, supra, pages 250, 251 of 251 U.S., 40 S.Ct. 135.

Soon after the passage of the act several federal courts were called upon to decide the question, and they uniformly held such claims were not provable debts under section 63. In re Ells (D.C.) 98 F. 967; In re Mahler (D.C.) 105 F. 428; Atkins v. Wilcox (C.C.A.) 105 F. 595, 53 L.R.A. 118. Since 1900 the Circuit Courts of Appeals in six circuits, and the District Courts in another, have agreed with these early adjudications. Slocum v. Soliday, (C.C.A. 1) 183 F. 410; McDonnell v. Woods, 298 F. 434 (C.C.A. 1); In re Roth & Appel, supra; In re Mullings Clothing Co. (C.C.A.2) 238 F. 58, L.R.A. 1918A, 539; In re Metropolitan Chain Stores Inc., 66 F.(2d) 482 (C.C.A.2); Trust Co. of Georgia v. Whitehall Holding Co. (C.C.A.5) 53 F.(2d) 635; Orr v. Neilly, 67 F.(2d) 423 (C.C.A.5); Wells v. Twenty-First Street Realty Co., 12 F.(2d) 237 (C.C.A.6); Britton v. Western Iowa Co., 9 F.(2d) 488, 45 A.L.R. 711 (C.C.A.8); Colman Co. v. Withoft, 195 F. 250 (C.C.A.9); Bray v. Cobb (D.C.) 100 F. 270; In re Hook (D.C.) 25 F.(2d) 498. The decisions in the Third Circuit turn upon a special form of lease drawn to take advantage of a local statutory provision, and, while establishing a rule differing from that elsewhere recognized, are not inconsistent with it. See Wilson v. Pennsylvania Trust Co., 114 F. 742; South Side Trust Co. v. Watson, 200 F. 50; In re H. M. Lasker Co., 251 F. 53; Rosenblum v. Uber, 256 F. 584. The Court of Appeals of the Seventh Circuit has not discussed the question at length, but at least one of its decisions supports the view that a claim for loss of future rentals may be proved. In re Chakos, 24 F.(2d) 482; compare In re Desnoyers Shoe Co., 227 F. 401; In re National Credit Clothing Co., 66 F.(2d) 371.

This court has never had occasion to pass upon the precise point. It has not, however, expressed disapproval of the rulings of the great majority of the lower federal courts, and has cited many of their decisions with apparent approbation. See Central Trust Co. v. Chicago Auditorium Association, 240 U.S. 581, 589, 590, 36 S.Ct. 412, 60 L.Ed. 811; Wm. Filene's Sons Co. v. Weed, 245 U.S. 597, 38 S.Ct. 211, 62 L.Ed. 497; Gardiner v. Butler & Co., 245 U.S. 603, 605, 38 S.Ct. 214, 62 L.Ed. 505; Maynard v. Elliott, 283 U.S. 273, 278, 51 S.Ct. 390, 75 L.Ed. 1028.

In accord with the well-nigh unanimous view of the federal courts reiterated for over thirty years are statements of leading textwriters. Collier, Bankruptcy, vol. 2, p. 1422; Remington, Bankruptcy, vol. 2, §§ 789, 793; Loveland, Bankruptcy, vol. 1, § 313.

What of the activities of the Congress while this body of decisions interpreting section 63a was growing? From 1898 to 1932 the Bankruptcy Act was amended seven times without alteration of the section. This is persuasive that the construction adopted by the courts has been acceptable to the legislative arm of the government. B. & O. Railroad Co. v. Baugh, 149 U.S. 368, 372, 13 S.Ct. 914, 37 L.Ed. 772.

In this situation 'only compelling language in the statute itself would warrant the rejection of a construction so long and so generally accepted.' Maynard v. Elliott, supra, page 277 of 283 U.S., 51 S.Ct. 390, 391. If the rule is to be changed, Congress should so declare.

The petitioners call attention to the last clause of section 74(a), which is one of the sections added to the Act in 1933: 'A claim for future rent shall constitute a provable debt and shall be liquidated under section 63b (section 103(b)) of this title.' Sections 73 to 76, inclusive, were enacted to permit extensions and compositions not theretofore possible. They apply only to individuals. It is highly unlikely that, if the quoted sentence had been intended as an amendment of section 63a, it would have been placed in context dealing only with the novel procedure authorized by the new sections. Moreover, the discussion on the floor of the Senate relative to the insertion of the sentence, indicates that it was not intended to alter section 63a as it then stood. The petitioners insist the clause is declaratory of the law, as understood by the Congress; but there is no evidence to support this view, and it is inconsistent with the long-standing contrary judicial construction.

It remains to consider the effect of the indemnity covenants in the leases. These do not provide for liquidation of damages (compare Wm. Filene's Sons Co. v. Weed, supra), nor indeed for any right to damages for breach of the covenant to pay rent.

In No. 505, the agreement is, in the event of re-entry and reletting by the landlord, to pay each month the deficit accruing from the difference between the amount to be paid as rent under the lease and the amount received by the landlord from the premises throughout the residue of the original term; and, further, that the overplus, if any, at the expiration of the term, shall be paid to the tenant, unless the landlord, within six months from re-entry, release the tenant from all liability under the covenant, which the landlord is authorized to do, thus terminating all rights and liabilities under the agreement of lease.

In No. 506, the stipulation is that upon bankruptcy the landlord may re-enter and thereby terminate the lease, and the lessee covenants that, in such case, 'it will indemnify the Lessor against all loss of rent which the Lessor may incur by reason of such termination, during the residue of the term. * *  * '

In both cases the lessor has the choice whether he will terminate the lease. Neither the bankrupt nor the trustee has any such option, except as the trustee may be entitled by law to disclaim. And upon the exercise of the option by the landlord, a new contract, distinct from that involved in the original letting, becomes operative. While there is some color for the claim that bankruptcy is an anticipatory breach of the lease contract, entailing a damage claim against the estate, this cannot be true as respects these independent covenants of indemnity. For here, the landlord does not rely upon the destruction of his contract by the bankruptcy; he initiates a new contract of indemnity by the affirmative step of re-entry. And this new contract comes into being not by virtue of the bankruptcy proceeding, but by force of the act of re-entry, which must occur at a date subsequent to the filing of the petition. Obviously this contract of indemnity is not breached by bankruptcy, and cannot be breached until the duty of indemnifying the landlord arises. That obligation cannot be complete until the expiration of the original term. There can be no debt provable in bankruptcy arising out of a contract which becomes effective only at the claimant's option and after the inception of the proceedings, the fulfillment of which is contingent on what may happen from month to month or up to the end of the original term. Compare In re Ells, supra; Slocum v. Soliday, supra; In re Roth & Appel, supra. Such a covenant is not, as petitioners contend, the equivalent of an agreement that bankruptcy shall be a breach of the lease and the consequent damages to the lessor be measured by the difference between the present value of the remainder of the term and the total rent to fall due in the future. The covenants appearing in the leases in question cannot be made the basis of a proof of debt against the estate.

The judgments are affirmed.