Connecticut Ry. & Lighting Co. v. Palmer

• Decision Date: 13 February 1940
• Docket Number: No. 201.,201.
• Court: U.S. Court of Appeals — Second Circuit
• Parties: CONNECTICUT RY. & LIGHTING CO. v. PALMER. In re NEW YORK, N. H. & H. R. CO.

109 F.2d 568 (1940)

CONNECTICUT RY. & LIGHTING CO. v. PALMER. In re NEW YORK, N. H. & H. R. CO.

No. 201.

Circuit Court of Appeals, Second Circuit.

February 13, 1940.

Emmet, Marvin & Martin, of New York City (George W. Martin, of New York City, of counsel), for appellant.

Hermon J. Wells, of New Haven, Conn., and James Garfield, of Boston, Mass., for appellees.

Robert G. Dodge and Talcott M. Banks, Jr., both of Boston, Mass., amici curiae.

Before SWAN, CLARK, and PATTERSON, Circuit Judges.

PATTERSON, Circuit Judge.

The claim is for damages on rejection of a lease by a railroad in course of reorganization under section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. The claim has already been considered by this court and by the Supreme Court, and is here again after a second trial in the district court.

The claimant leased a street railway system to the New Haven for a 999 year term beginning in 1906. The agreed rent was $1,049,563.50 a year, and the New Haven was also to pay taxes on the lessor's income from the property. In October 1935, the New Haven filed petition for reorganization under section 77, and trustees were appointed. On December 18, 1935 the New Haven trustees rejected the lease as unprofitable. The claimant filed claim for damages caused by the rejection. The district court allowed the claim to the extent of damages accrued to the date of hearing in June 1937, some $1,260,000, and gave leave to prove damages accruing to the time of a later hearing. On appeal this court held that the claimant should also have been given an allowance on the tax covenant; in other respects the award was affirmed. The claimant took the case to the Supreme Court, on the point that the lower courts had erred in limiting the claimant to damages accrued at the time of a hearing. The Supreme Court sustained the claimant's position. Connecticut Railway & Lighting Co. v. Palmer, 305 U.S. 493, 59 S.Ct. 316, 83 L.Ed. 309. The measure of damages on rejection of a lease by a debtor under section 77, it was held, was the one generally applied by courts on repudiation of lease by a lessee — agreed rent for the balance of the term less rental value for the same period, both sums discounted to present worth. This measure of course includes prospective damages. The court went on to say that only such damages as might be proved to reasonable certainty were allowable, and that the difficulties in the way of proof were appreciated. Mention was made of the factors that uncertainty grew greater as the term lengthened, that it was harder to fix rental value of a street railway than rental value of a store, and that rejection of lease at a time of subnormal business conditions introduced further difficulties. The case was sent back for further proceedings.

On second trial in the district court in March 1939, the claimant sought to prove damages for the first 40 years after rejection of the lease. It conceded that for the 900 odd years beyond 1975 the damages were too vague to be estimated. As to the 40 years the claimant offered tabulations to show damages for each year to 1975. The present value of the agreed rent to 1975, at $1,049,563.50 a year discounted at four percent, came to about $20,000,000. The rental value was made up of interest from sinking fund, payments to sinking fund and operating income from the property. Only the last item presented difficulties. The operating income for 1936, 1937 and 1938, the first three years after rejection of the lease, was known; the results for those years, on the difference between agreed rent and rental value, showed damages of $1,838,485.35 already accrued at the time of the trial. For estimate of operating income beyond 1938 the claimant relied on past history of operating income and offered alternative bases, differing in the number of past years taken as experience for averaging income. One basis was the average annual operating income from July 1937 to December 1938, inclusive; this period, while covering only 18 months, was offered as a measure because it was the period of 100 percent bus operation, the present method of carrying passengers. A second basis was the average over 1936-1938, three years, that being the period of separate operation of the property. A third basis was the average over 1929-1938, an experience of ten years. A fourth basis took the average of 14 years, 1925-1938. On the alternative bases the present rental value for the 40 years ranged from $7,000,000 to $11,000,000. The claim for damages, the difference between present worth of agreed rent and present worth of rental value for 40 years, thus varied from $13,000,000 to $9,000,000, according to the experience taken in estimating annual income beyond 1938.

The district judge rejected all the past experiences tendered by the claimant as measures for estimating future earnings, — the 18 months because the time covered was one of subnormal business activity, the three years because of the same factor and also because a substantial part of the operation for half of the period was by trolley, the ten years and the 14 years because they included years when a large part of the operation was by trolley and also because it was thought that the frequency of good times and hard times reflected by these periods might not be duplicated in the future. The judge held further that even if the claimant proved enough to support an assessment of damages for part of the unexpired term, its inability to prove what the damages would be over the entire 969 years was fatal to the claim. He thought that the Supreme Court had laid stress on a high standard of proof, that no one could say what loss, if any, the lessor would sustain over the whole term of 969 years, and that he could not treat the lease as one for any shorter period. He therefore felt impelled to dismiss the claim, both as to damages accrued at the time of the hearing and as to damages estimated to accrue in future years. The only item allowed was a small one of $29,037.41 for income taxes accrued in 1936-1938 inclusive; this was allowed because it was provided for in the order entered on mandate from this court after the earlier appeal, an order which was viewed as a binding adjudication.

It goes without saying that damages for 969 years cannot be imagined, much less proved. The remainder of the lease covers a span longer than from the battle of Hastings to the present day. To try to forecast events for even a tenth of that futurity would appall the boldest prophet. It does not follow that the claimant should get no damages. For purposes of the age in which we live, we know that rejection of the lease caused a severe loss to the claimant. The lease was ruinous to the New Haven from the outset, and highly advantageous to the claimant. Year after year the agreed rent was greater than earnings of the leased property, greater by a wide margin. When the New Haven went into reorganization the trustees lost no time in disclaiming the lease as unprofitable. Since then the judgment of the trustees in...