Central Manhattan Properties v. DA Schulte, Inc., 335.

• Decision Date: 28 June 1937
• Docket Number: No. 335.,335.
• Citation: 91 F.2d 728
• Parties: CENTRAL MANHATTAN PROPERTIES, Inc., et al. v. D. A. SCHULTE, Inc., OF NEW YORK.
• Court: U.S. Court of Appeals — Second Circuit

91 F.2d 728 (1937)

CENTRAL MANHATTAN PROPERTIES, Inc., et al. v. D. A. SCHULTE, Inc., OF NEW YORK.

No. 335.

Circuit Court of Appeals, Second Circuit.

June 28, 1937.

Coughlan & Russell, of New York City (George Coughlan, of New York City, of counsel), for appellant Central Manhattan Properties, Inc.

William M. Chadbourne, of New York City (Clinton De Witt Van Siclen, of New York City, of counsel), for appellant Central Manhattan Properties Bondholders' Protective Committee.

Jerome Eisner and Ernst, Gale, Bernays & Falk, all of New York City (Henry I. Fillman, of New York City, of counsel), for appellee.

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

L. HAND, Circuit Judge.

This is an appeal from an order in bankruptcy, expunging a claim against a debtor in reörganization. The claimant had let six separate parcels of land in New York to the debtor, the rent in all cases being payable monthly in advance; the debtor had sublet most of these premises to others upon leases like its own; the sub-rents also payable monthly in advance. On June 1, 1936, it defaulted upon the payment of its rent for that month, but it collected some of the sub-rents before, and some after, June third, the day when it filed a voluntary petition for reörganization. The judge approved this petition, kept the debtor in possession and enjoined all suits against it. The lessor made no effort during the month to be relieved of this injunction, but now claims the sub-rents collected, the debtor not having affirmed or rejected the lease. It asserts that it had an equitable lien upon them under Otis v. Conway, 114 N.Y. 13, 20 N.E. 628, and if not, that it was entitled to them because the court at the debtor's request had taken away its remedies. The judge ruled against it on both points and expunged the claim.

The power of a trustee in bankruptcy, and of a debtor in reörganization, to withhold leased property pending deliberation, is too well settled for debate. The often considered language in subdivision (b) (10) of section 77B (11 U.S.C.A. § 207(b) (10) presupposes it, and is built upon it, though the debtor must decide within a reasonable time, and the lessor can force it to do so, if it does not. The period of its indecision, short or long, is necessarily at the expense of the lessor, and for the sole benefit of the debtor, which in effect is allowed to play fast and loose with the property, while its affairs are being straightened out. The resulting equities at bar may best be viewed by considering the situation in case the debtor affirms, and in case it rejects, a lease. If it affirms, it will have to pay the rent due on June 1, 1936, for the debt is secured by the right to reënter, a right given in New York whether expressly reserved or not (section 1410, subdivision 2, Civil Practice Act). Such a debt could not be discharged by the plan without the creditor's consent, or something of equal value as the security. Indeed, the very affirmance would itself be an assent to all the conditions of the term. The June rent is not, of course, the same as the June sub-rents, and an over-payment may result, if the debtor be directed to turn these over at once; but the record does not suggest that it will, and if it does, the surplus can be credited upon future rent.

If on the other hand the debtor rejects a lease, it could keep the June subrents only on the theory that, being choses in action due before petition filed, they became its property once and for all, regardless of anything that might overtake the sub-lessees through its own default. We need not go into the question whether it could have collected any sub-rents not collected, or have held any that it had collected, if the lessor had evicted it and its sub-lessees along with it. If it could not, its right to the sub-rents depended absolutely upon the court's keeping off the lessor. That question depends upon the covenant of quiet enjoyment in the sub-leases, In re United Cigar Stores (Ex parte Cloudy), 82 F.(2d) 247 (C.C.A. 2). Giles v. Comstock, 4 N.Y. 270, 53 Am. Dec. 374; Hayden Co. v. Kehoe, 177 App. Div. 734, 164 N.Y.S. 686; and as they are not in the record, we will assume that there were none such. But the debtor gained in another way by holding off the lessor, quite aside from any power to collect the subrents; that gain was measured by the value of the option which it secured through the injunction, the same kind of right which in stock markets is bought and sold as a "call." Since the loss imposed upon the lessor is too obvious for debate, it follows that the debtor has been unjustly enriched at the expense of the lessor. It would be contrary to every principle of equity if the property so withheld should not be subjected to a constructive trust in favor of the lessee. Section 160, Comment. c & d., Restatement of Unjust Enrichment (Proposed Final Draft March 5, 1936). It is to be observed, however, that the trust res is not the subrents themselves, on which by hypothesis the lessor has no claim, but the premises. For this reason it might...