Kennedy v. Boston-Continental Nat. Bank, 3131

• Decision Date: 25 June 1936
• Docket Number: 3132.,No. 3131,3131
• Citation: 84 F.2d 592
• Parties: KENNEDY v. BOSTON-CONTINENTAL NAT. BANK et al. BOSTON-CONTINENTAL NAT. BANK et al. v. KENNEDY.
• Court: U.S. Court of Appeals — First Circuit

84 F.2d 592 (1936)

KENNEDY v. BOSTON-CONTINENTAL NAT. BANK et al.

BOSTON-CONTINENTAL NAT. BANK et al. v. KENNEDY.

Nos. 3131, 3132.

Circuit Court of Appeals, First Circuit.

June 25, 1936.

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George B. Rowlings, of Boston, Mass. (Tyler, Eames, Wright & Reynolds, Charles A. Rome, Lewis H. Weinstein, and Joseph Sugarman, all of Boston, Mass., on the brief), for Kennedy and Ulin.

Murray F. Hall and Donald J. Hurley, both of Boston, Mass. (Goodwin, Procter & Hoar, of Boston, Mass., on the brief), for Boston-Continental Nat. Bank and Deitrick, receiver.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

BINGHAM, Circuit Judge (after stating the facts as above).

The matters to which the parties have chiefly addressed themselves relate to count 5, in which the plaintiff seeks to recover liquidated damages under a covenant of the lease wherein the lessee covenants to pay the lessor, upon the termination of the lease, the excess of the rent reserved over the fair rental value of the premises for the residue of the term. Under this count the District Court allowed the plaintiff to recover $56,580.70, which is said to be the excess of the rent reserved over the fair rental value from the termination of the lease, about August 31, 1932, to February 1, 1945, less five per cent.

It would seem that the court, in allowing this sum as liquidated damages, must have considered that the liability of the lessee bank became fixed and the sum of $56,580.70 due and owing to the plaintiff on December 17, 1931, the date the bank was declared insolvent by the Comptroller, if there was to be a ratable distribution of the bank's assets among its creditors. After pointing out that the liquidation of a national bank is a statutory proceeding, not one in equity, and, on its being declared insolvent, required a ratable distribution of its assets among its creditors, it stated its view of the law to be that "in adjudicating a claim against the receiver of a national bank the true rule to be applied to the claim of a lessor under a written lease * * * is as follows: If the claim is grounded on a liability absolutely and unconditionally fixed at the time of insolvency, and capable of being determined as to amount when the claim is presented, it may be allowed if seasonably presented." But in applying the rule to the facts of this case the court proceeded on the theory that, under the covenant for liquidated damages, upon the termination of the lease by notice and entry, as therein provided, the liability of the lessee under that covenant became absolutely and unconditionally fixed and the liquidated damages due and owing on the date of insolvency, or as early as December 1, 1931, when the breach of the covenant to pay rent was broken, even though the termination of the lease by notice and entry, upon which the liability was to arise and become fixed, did not take place until long after December 17, 1931. In other words, although the lease, in unequivocal terms, gave the lessor the option, on the breach of the covenant to pay the rent, to determine the lease by a written demand for the payment of the defaulted rent, and, in case it was not paid within thirty days thereafter, to exercise his option by entering upon the leased premises and terminating the lease (all of which acts took place subsequent to December 17, 1931), that the exercise of the option by entry and termination of the lease was not a condition to the creation and fixing of the lessee's liability on the covenant for liquidated damages, and the covenant became operative and the liability of the lessee absolutely fixed on or before December 17, when the lessee-bank was declared insolvent.

If this is what the rule, as stated and applied by the court, means, we cannot accede to it.

By the terms of the lease, its termination by written demand, notice, and entry (the lessee's default still continuing) was a condition precedent to the lessee's liability under the covenant to pay liquidated damages, and until the acts terminating the lease were had and the lease terminated, the lessee's liability under that covenant did not arise and become fixed, and, as these acts and the consequent termination of the lease took place after the declaration of insolvency (December 17, 1931), no liability of the lessee to pay liquidated damages can be said to have arisen and become fixed on or before that date.

The authorities are numerous in the Supreme Court and in the Circuit Courts of Appeal that, to establish a claim against an insolvent national bank in receivership, the liability of the bank (here the lessee) must have accrued and become unconditionally fixed on or before the time it is declared insolvent. Cook County National Bank v. United States, 107 U.S. 445, 2 S.Ct. 561, 27 L.Ed. 537; Scott v. Deweese, 181 U.S. 202, 21 S.Ct. 585, 45 L.Ed. 822; Murray v. Sill (C.C.A.) 7 F.(2d) 589; Dakin v. Bayly, 290 U.S. 143, 54 S.Ct. 113, 78 L.Ed. 229, 90 A.L.R. 999; Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L.Ed. 1059; Merrill v. National Bank of Jacksonville, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640; Chemical National Bank v. Armstrong (C.C.A.) 59 F. 372, 28 L.R.A. 231; Kershaw v. Jenkins (C.C.A.) 71 F.(2d) 647; American National Bank v. Williams (C.C.A.) 101 F. 943; Citizens' Bank & Trust Company v. Thornton et al. (C.C.A.) 174 F. 752; American Surety Company v. De Carle (C.C.A.) 25 F.(2d) 18; Steele v. Randall (C.C.A.) 19 F.(2d) 40; Miller v. Irving Trust Company, 296 U.S. 256, 56 S.Ct. 189, 80 L.Ed. 211.

The amount of the claim may be later established, but, when established, it must be the amount due and owing at the time of the declaration of insolvency, as of which time it is entitled, with the claims of the other creditors, to a ratable distribution of the assets of the bank. If nothing is due at the time of insolvency, the claim should not be allowed, for that would be in violation of the National Bank Act (12 U.S.C.A. § 194) calling for a ratable distribution.

In Manhattan Properties v. Irving Trust Company, 291 U.S. 320, 337, 338, 54 S.Ct. 385, 389, 78 L.Ed. 824, the court, in construing the covenants in two leases conditioned on re-entry and termination of the leases, said: "In both cases the lessor has the choice whether he will terminate the lease. * * * 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." (Italics supplied.)

No more was there here an anticipatory breach of the covenant to pay liquidated damages as that covenant did not become operative until after termination of the lease by entry, which was subsequent to the declaration of insolvency. Had the lease contained a covenant that insolvency shall be a breach of the lease and thereupon, without any further action by the lessor, the lease shall terminate and the lessor be entitled forthwith to damages measured, as provided in the covenant of the lease for liquidated damages, then, on the declaration of insolvency, no doubt a claim would arise and be matured by the agreement for liquidated damages, as indicated in Manhattan Properties v. Irving Trust Co., supra, at the bottom of page 338 of 291 U.S., at page 389 of 54 S.Ct., 78 L.Ed. 824, and as was held in Irving Trust Co. v. A. W. Perry, Inc., 293 U.S. 307, 308, 55 S.Ct. 150, 79 L.Ed. 379, so that the claim would be provable in bankruptcy. But that is not this case. There is no such covenant or agreement in this lease. In the Manhattan Case, a case in bankruptcy, the time of filing the...