Burns Trading Co. v. Welborn

• Decision Date: 22 February 1936
• Docket Number: No. 1264.,1264.
• Citation: 81 F.2d 691
• Parties: BURNS TRADING CO. v. WELBORN et al. In re MOUNTAIN STATES THEATRE CORPORATION'S ESTATE.
• Court: U.S. Court of Appeals — Tenth Circuit

81 F.2d 691 (1936)

BURNS TRADING CO. v. WELBORN et al.

In re MOUNTAIN STATES THEATRE CORPORATION'S ESTATE.

No. 1264.

Circuit Court of Appeals, Tenth Circuit.

January 29, 1936.

Rehearing Denied February 22, 1936.

Ben S. Wendelken, of Colorado Springs, Colo. (David P. Strickler, of Colorado Springs, Colo., on the brief), for appellant.

Walter M. Appel, of Denver, Colo. (Ira C. Rothgerber, of Denver, Colo., on the brief), for appellees.

Before LEWIS, PHILLIPS, and McDERMOTT, Circuit Judges.

PHILLIPS, Circuit Judge.

On December 7, 1928, the Burns Trading Company, as lessor, and the Mountain States Theatre Corporation as lessee, entered into a lease of the theatre portion of a building known as the Burns Theatre building, in Colorado Springs, Colorado, for a term of twenty years from December 15, 1928, for a rental of $17,000 per year, payable in equal monthly installments of $1,416.67.

Paragraphs numbered 16 and 20-½ of the lease read as follows:

"16. If Lessee shall default in the payment of rent or in the performance of any other covenant and condition of this lease and if the default in the payment of rent shall continue for 30 days after receipt of written notice of default to Lessee, or if Lessee shall continue in default in performing any other covenant and condition for a period of 60 days after receipt of written notice from Lessor to Lessee, specifying the default claimed, then Lessor may, at his option, re-enter and repossess said premises with or without process of law, and terminate this lease. And if at any time said term shall be ended at such election of said Lessor, its successors and assigns, as aforesaid, or in any other way, the said Lessee does hereby covenant and agree to surrender and deliver up said above described premises, furniture and property peaceably to said Lessor, immediately upon the termination of said term as aforesaid, and if it shall remain in possession of the same after notice of default as aforesaid, or after the termination of this lease, or in any of the ways above named, it shall be deemed guilty of a forcible detainer of said premises and furniture under the statute, and shall be subject to all the conditions and provisions above named, and to eviction and removal, forcible or otherwise, with or without process of law, as above stated."

"20-½. Lessee agrees to deposit with Lessor the sum of Seventeen Thousand Dollars ($17,000.00) in cash, which sum shall represent payment for the last year's rent, under the terms of this lease, to-wit: The rent for the year beginning December 15th, 1947, and ending December 15th, 1948 (exclusive for charge for heating, etc., as herein provided). Interest on said deposit at the rate of six per cent (6%) per annum shall be paid by the Lessor to the Lessee at the beginning of each fiscal year hereunder, or may be deducted by the Lessee from the installment of rent due hereunder for the first month of each fiscal year. Lessee shall make the deposit herein referred to simultaneously with the delivery to it of a bond undertaking of a responsible Surety Company or a responsible other corporation authorized under the laws of Colorado to execute and deliver the same, guaranteeing to the Lessee, its successors and assigns, the due and proper application of such deposit under the terms of this lease and the payment or allowance of interest thereon as aforesaid.

"It is understood and agreed that if said lease is at any time terminated by the Lessor for any reason on account of the failure or default of the Lessee in carrying out the terms of this lease as herein provided, that said deposit of $17,000.00 shall be retained by Lessor as liquidated damages, and Lessee shall have no further right to same, and Lessor shall not be required to pay any further interest thereon from date said lease is so terminated."

The Theatre Corporation deposited the sum of $17,000 with the Burns Company in accordance with the provisions of paragraph 20-½ of the lease.

On February 3, 1933, the Burns Company gave written notice to the Theatre Corporation of a default in the payment of rental. The notice recited the provisions of paragraph numbered 16 of the lease, and further stated:

"Now we hereby give you notice in accordance with the above covenants in regard to rent, that said default in the payment of said rent has been made by you, and that said default occurred on January 30, 1933, at which time said rent was due and payable; and we further give you notice that in the event of you disregarding this notice, or in the event that said rent is not paid pursuant to this letter, that we shall, at our option, re-enter and repossess said demised premises as of our former estate."

On February 14, 1933, the Theatre Corporation filed its voluntary petition in bankruptcy and Wilbur Newton was appointed as its receiver. The receiver occupied the demised premises until April 8, 1933. On the latter date, the Theatre Corporation was adjudged a bankrupt and Welborn, Finske, and Lowndes were appointed as trustees of the bankrupt's estate.

On March 1, 1933, the Burns Company, at the request of Finske, acting for the Theatre Corporation, extended the time to exercise the option to terminate the lease until April 1, 1933, but expressly reserved the right to exercise the option to terminate the lease and to re-enter, and repossess the demised premises, if the default continued beyond the latter date.

On March 17, 1933, the Burns Company, at the request of Finske, acting for the Theatre Corporation, made a further like extension, with a like reservation, until May 1, 1933.

The trustees occupied the demised premises until June 23, 1933. On the latter date pursuant to an order of the referee, they rejected the lease and vacated the demised premises. Thereupon, the Burns Company took possession of the demised premises and leased them to the Westland Theatre Corporation at a rental of $9,500.00 per year, or 15 per cent of the gross income of the theatre whichever should be greater. The rental for the first year under the new lease amounted to $11,880.97.

The trustees brought this action against the Burns Company to recover the amount of the deposit, less the rental due to June 23, 1933. From a judgment in favor of the trustees for $14,126.64, being the amount of the deposit plus interest accrued thereon, less the unpaid rental to June 23, 1933, the Burns Company has appealed.

The lease of December 7, 1928, contains no provision for a reletting for the Theatre Corporation's account. The Burns Company gave no notice to the Theatre Corporation that it was reletting the premises for the latter's account. There was no evidence that the Theatre Corporation had notice of, or consented to the reletting. Under these circumstances we must assume the Burns Company, on June 23, 1933, elected to exercise its option to terminate the lease for default of the Theatre Corporation, pursuant to the provisions of paragraph 16, and to retain the deposit as liquidated damages under the provisions of paragraph 20-½.

It will be noted that paragraph 20-½ provides for the application of the deposit on the last year's rental when due, for the payment of interest on the deposit by the Burns Company, and for the giving of a bond by the Burns Company to insure the proper application of the deposit and the payment of interest thereon. It is clear from these provisions that the title to the deposit was to remain in the Theatre Corporation until it should be properly applied on rental or retained as liquidated damages on termination of the lease.

Prior to the amendment of June 7, 1934, 11 U.S.C.A. § 103, rent not due and payable before the bankruptcy was not a provable debt;¹ the bankruptcy of the tenant did not sever the relation of landlord and tenant; and the tenant remained liable for future rentals, unless the trustee elected to retain the lease as an asset.²

Therefore, when the trustees elected to reject the lease it remained in force and effect between the Burns Company and the Theatre Corporation, and the latter had the right to occupy the leased premises and was bound by all the terms and conditions of the lease, until it was terminated by the Burns Company.³

The trustees could not reject the lease and claim the deposit freed from the obligations of the lease. They succeeded only to the rights of the Theatre Corporation in the deposit, as conditioned by the provisions of the lease.⁴

Was the Burns Company, on the termination of the lease, entitled to retain the deposit as liquidated damages?

It is urged that since the lease contained a number of covenants of varying degrees of importance to be performed by the Theatre Corporation, and by paragraph 16 the Burns Company, upon continued default by the Theatre Corporation in the performance of any one of such covenants after the expiration of the notice period provided for in such paragraph, was given the right to terminate the lease, the provision for retention of the deposit in the event of such termination of the lease must be regarded as a penalty.

It is generally held, where a contract contains a number of covenants of varying degrees of importance, a provision that a fixed sum shall be paid for the breach of any one, is a penalty.⁵ But for reasons we shall presently state, we do not think the principle is applicable here.

The test for determining whether a provision in a contract is for a penalty or for liquidated damages was stated by the Supreme Court in Wise v. United States, 249 U.S. 361, 39 S.Ct. 303, 304, 63 L.Ed. 647, as follows:

"The subject of the interpretation of provisions for liquidated damages in contracts, as contradistinguished from such as provide for penalties, was elaborately and comprehensively considered by this court in Sun Printing & Publishing Association v. Moore, 183 U.S. 642, 22 S.Ct. 240, 46 L.Ed. 366, applied in United States v. Bethlehem Steel Co., 205 U.S. 105, 27 S.Ct. 450, 51 L.Ed. 731, and the...