In re F. & W. Grand 5-10-25 Cent Stores, 113.

• Citation: 74 F.2d 654
• Decision Date: 07 January 1935
• Docket Number: No. 113.,113.
• Parties: In re F. & W. GRAND 5-10-25 CENT STORES, Inc. URBAN PROPERTIES CO. v. IRVING TRUST CO.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

74 F.2d 654 (1935)

In re F. & W. GRAND 5-10-25 CENT STORES, Inc.

URBAN PROPERTIES CO. v. IRVING TRUST CO.

No. 113.

Circuit Court of Appeals, Second Circuit.

January 7, 1935.

Gotthold & Gross, of New York City, and Livingston & Livingston, of San Francisco, Cal. (Arthur F. Gotthold, of New York City, and Lawrence Livingston, of San Francisco, Cal., of counsel), for appellant.

Cravath, De Gersdorff, Swaine & Wood, of New York City (William D. Whitney, Carl W. Painter, and Frank H. Detweiler, all of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

L. HAND, Circuit Judge.

The claimant appeals from an order of the District Judge affirming the order of a referee, expunging its claim for rent falling due after petition filed. The facts are as follows: In November, 1929, the claimant leased to the bankrupt a parcel of land in California, on which before August 1, 1932, it was to build a suitable store; if it did, the bankrupt on that day would enter for a term of twenty-five years, paying rent. The lessor reserved power to re-enter for failure to pay rent, but the lessee did not promise in that event to pay the difference between the rent reserved and the value for the residue of the term. The bankrupt fell on evil times and receivers were appointed for it on March 19, 1932, in the Southern district of New York, upon the customary sequestration bill; ancillary receivers following in California, who disaffirmed the lease. Thereafter on July 14, 1932, the lessee was adjudged bankrupt, and the question is whether a claim for future rent is good. The referee and the judge thought not, and the claimant appealed. It argues that there is a difference between this situation and that of a lease in which the lessee has taken possession and then goes bankrupt without any preliminary receivership, in which event it concedes, as indeed it must, that Manhattan Properties v. Irving Trust Co., 291 U. S. 320, 54 S. Ct. 385, 78 L. Ed. 824, would rule. Rather it says that, the breach being both before entry and before petition filed, the cause of action is fixed and the damages calculable. They are the sum of the future rents — discounted, we assume, to the date of the breach — less the then value of the term. This being a sum readily ascertainable, the claim is provable under § 63b, Bankr. Act (11 USCA § 103(b). They rely upon our decision in Re Mullings Clothing Co., 238 F. 58, and that of the Seventh circuit in Lloyd Investment Co. v. Schmidt, 66 F.(2d) 371, which followed it.

Since Central Trust Co. v. Chicago Auditorium Ass'n, 240 U. S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L. R. A. 1917B, 580, the bankruptcy of a debtor has been regarded as an anticipatory breach, resulting in a provable claim, on the theory that it comes into existence at the very instant of bankruptcy. Maynard v. Elliott, 283 U. S. 273, 51 S. Ct. 390, 75 L. Ed. 1028, carried this further by holding that contingent claims might be proved, if not too contingent either in amount or in obligation. That would have paved the way for proof of claims for any future rent, or for the breach of a covenant to pay the difference between the future rents and the present value of the term. The ratio decidendi of In re Roth & Appel, 181 F. 667, 31 L. R. A. (N. S.) 270 (C. C. A. 2), was discredited and the decision might have fallen too. But the Supreme Court in Manhattan Properties v. Irving Trust Co., 291 U. S. 320, 54 S. Ct. 385, 78 L. Ed. 824, said no; they thought that the long course of bankruptcy legislation showed that rents were meant to stand apart, and were not provable even under statutes which allowed contingent claims generally. That doctrine does indeed have limits (Irving Trust Co. v. A. W. Perry, Inc., 293 U. S. 307, 55 S. Ct. 150, 79 L. Ed. ___), but we are to take it that rents which are conditional upon the endurance of the term are not provable, because they may never become payable; the lessor may re-enter.

In Re Mullings Clothing Co., 238 F. 58, we held a claim provable in bankruptcy in circumstances substantially like those at bar. The bankrupt lessee had not entered under the new lease, though it was in under an existing lease. Its directors — it was a company — voted to dissolve it and had a receiver appointed in dissolution who disaffirmed the lease before entry or petition filed. We cannot distinguish the two situations and this order must be reversed or that decision overruled. Although it was decided some six months after Central Trust Co. v. Chicago Auditorium Ass'n, supra, 240 U. S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L. R. A. 1917B, 580, the opinion did not mention that decision and the court was apparently unaware of it. True, it did discuss generally the doctrine of anticipatory breach, but without specific reference to a petition in bankruptcy; being concerned only with the appointment of the receiver on dissolution. It distinguished In re Roth & Appel, supra, 181 F. 667, 31 L. R. A. (N. S.) 270, because section 63b, 11 USCA § 103 (b), did not cover contingent claims, which we now know to be untrue; but aside from that it is really impossible to see what uncertainties infested the claim in Re Roth & Appel that were absent in Re Mullings Clothing Co. The fact that there was an existing cause of action makes no difference, once one admits that bankruptcy creates an anticipatory breach on which a provable claim may be filed. It can be of no consequence how wide the span is between breach and bankruptcy, whether ten days or more, or a merely imaginary duration. Rent claims of all sorts are refused recognition merely because they are rent claims, and there is no more to be said about it, except that if wholly free from all uncertainty they are sometimes provable.

Nor is it important that the lessee may not have entered at petition filed. It is true that in that case he also breaks the implied promise to enter, but no damages flow from that; damages arise only from the failure to pay the rent as it falls due, and, while the ancient law did indeed recognize a difference between rent and a promise to pay rent, it is a barren distinction now. But a lessee promises once for all to pay the future rents when he signs the lease; and he commits an anticipatory breach of that promise when a receiver is appointed or bankruptcy occurs, whether or not he has entered. The difficulty in neither case is that a cause of action has not accrued, but that the amount of the recovery is uncertain; and that uncertainty is as great when the lessee has not entered, as when he has; perhaps more. Nobody can tell in either case how long the term would have lasted or how many installments would ever have become due. True, that uncertainty is no greater than the law has met and answered in other situations, but the doctrine is based in history, not logic.

We have three times before indicated that In re Mullings Clothing Co., supra, 238 F. 58, had become of doubtful authority. Jones Co. v. Winchester Repeating Arms Co. (C. C. A.) 61 F.(2d) 774, 776; Malavazos v. Irving Trust Co. (C. C. A.) 66 F.(2d) 483, 484; Possart v. Irving Trust Co. (C. C. A.) 69 F.(2d) 807, 808. In the last of these we said that we did not see how it could survive Manhattan Properties v. Irving Trust Co., supra, 291 U. S. 320, 54 S. Ct. 385, 78 L. Ed. 824; but we have never before been faced with the choice of following or overruling it. Although Lloyd Investment Co. v. Schmidt, supra, 66 F.(2d) 371, followed it, that was before Manhattan Properties v. Irving Trust Company. Perhaps the Supreme Court will feel obliged to consider the difference of opinion between ourselves at present and the Seventh circuit, but until it decides otherwise we definitively overrule In re Mullings Clothing Co.

Order affirmed.

MANTON, Circuit Judge (dissenting).

November 9, 1929, appellant, as lessor, and the bankrupt, as lessee, entered into an agreement to lease certain premises in Los Angeles, Cal., for twenty-five years from August 1, 1932, or from the date of the completion of a new building, which the appellant agreed to construct for the use of the bankrupt. The rent was on a rising scale to be paid in monthly installments. Before the term of the lease commenced and before the building was constructed, in March, 1932, receivers in equity were appointed for the bankrupt with ancillary receivers in California, and, on May 21, 1932, prior to the commencement of the term of the lease and the construction of the building, the ancillary receivers in California disaffirmed the lease, advising the appellant accordingly. This was a breach before the term commenced and before there was any privity of estate between the appellant and the bankrupt. Bankruptcy followed July 14, 1932. The reasonable rental value of the property with the proposed building thereon was fixed at $102,500, whereas the rent reserved in the lease for the entire term was $215,000. The appellant made claim for the difference, $112,500. This appeal is from an order disallowing the claim.

In Central Trust Co. v. Chicago Auditorium Ass'n, 240 U. S. 581, 36 S. Ct. 412, 415, 60 L. Ed. 811, L. R. A. 1917B, 580, the court held that bankruptcy may constitute an anticipatory breach of an executory agreement, and the court made reference to In re Roth & Appel, 181 F. 667, 669, 31 L. R. A. (N. S.) 270 (C. C. A. 2), indicating that claims for future rents after a breach caused by bankruptcy, would not be allowed against the bankrupt estate. This has long been considered an exception based upon Lord Coke's dictum as to the "diversity between duties which touch the realty, and the mere personalty." In the Chicago Auditorium Ass'n Case, supra, the court announced that "Proceedings, whether voluntary or involuntary, resulting in an adjudication of bankruptcy, are the equivalent of an anticipatory breach of an executory agreement." In Re Roth & Appel, supra, a petition in bankruptcy was filed prior to the time the term...