Manhattan Properties v. Irving Trust Co Brown v. Same

Decision Date05 February 1934
Docket NumberNos. 505,506,s. 505
Citation291 U.S. 320,54 S.Ct. 385,78 L.Ed. 824
PartiesMANHATTAN PROPERTIES, Inc., v. IRVING TRUST CO. * BROWN et al. v. SAME
CourtU.S. Supreme Court

[Syllabus from pages 321-325 intentionally omitted] Messrs. William D. Mitchell and Charles Dickerman Williams, both of New York City, for petitioners.

[Argument of Counsel from pages 321-326 intentionally omitted] Mr. Frederick H. Wood, of New York City, for respondents.

[Argument of Counsel from pages 326-328 intentionally omitted] Mr. Justice ROBERTS delivered the 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.1

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.2

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.'3

'Section 1. (11) 'Debt' shall include any debt, demand, or claim provable in bankruptcy.'4

'Sec. 17. A discharge in bankruptcy shall release a bankrupt from all of his provable debts. * * *'5 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 cred- itors, 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, 1800,6 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,7 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...

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