City Bank Farmers Trust Co v. Irving Trust Co

• Decision Date: 04 January 1937
• Docket Number: No. 260,260
• Citation: 299 U.S. 433,57 S.Ct. 292,81 L.Ed. 324
• Parties: CITY BANK FARMERS TRUST CO. v. IRVING TRUST CO. et al
• Court: U.S. Supreme Court

299 U.S. 433

57 S.Ct. 292

81 L.Ed. 324

CITY BANK FARMERS TRUST CO.

v IRVING TRUST CO. et al.

No. 260.

Argued Dec. 16, 1936.

Decided Jan. 4, 1937.

Mr. Henry L. Glenn, of New York City (Mr. Rollin Browne, of New York City, on the brief), for petitioner.

Mr. Wm. D. Whitney, of New York City (Mr. R. L. Gilpatrick, of New York City, on the brief), for respondents.

Messrs. John Gerdes and John Godfrey Saxe, both of New York City, amici curiae.

Mr. Justice ROBERTS delivered the opinion of the Court.

Certiorari was granted in this and three following cases (Kuehner v. Irving Trust Co., 299 U.S. 445, 57 S.Ct. 298, 81 L.Ed. 340; Schwartz v. Irving Trust Co., 299 U.S. 456, 57 S.Ct. 303, 81 L.Ed. 348; Meadows v. Irving Trust Co., 299 U.S. 464, 57 S.Ct. 307, 81 L.Ed. 353) involving the construction and validity of provisions of section 77B of the Bankruptcy Act¹ which enlarge the category of provable claims to include one by a landlord for injury due to rejection of a lease, or for damages or indemnity under a lessee's covenant.

Florence H. Bugbee, the petitioner's assignor, leased to United Cigar Stores Company of America premises in Trenton, N.J., for a term commencing April 1, 1926, and ending March 31, 1946. August 29, 1932, the lessee was adjudicated a bankrupt upon its own petition. November 11, 1932, the respondent, as trustee in bankruptcy, rejected the lease and abandoned the premises, a portion of which had been sublet by the bankrupt. Without notice to the Cigar Stores Company the landlord relet portions of the building to subtenants in possession and let other portions to new tenants.

June 9, 1934, two days after the passage and effective date of section 77B, the Cigar Stores Company, as permitted by subsection (p), 11 U.S.C.A. § 207(p), filed in the pending bankruptcy proceeding its petition for reorganization. In the latter cause the petitioner presented a proof of claim for injury resulting from the rejection of the lease. The trustee objected to the claim and asked to have it expunged for the reason that the lease incorporated no covenant to indemnify the lessor for loss of rents or other provision enabling her to hold the tenant for damages or for rent accruing subsequent to termination of the leasehold estate, and asserted the leasehold had been terminated and all obligations of the debtor under the lease extinguished by the landlord's re-entry and reletting.

The special master who heard the cause recommended disallowance of the claim in the view that section 77B did not, and could not, create any valid and legal claims against the debtor where none existed anterior to the enactment of the section, and held that none existed before its adoption because by the law of New Jersey, the landlord's re-entry and reletting worked a surrender of the leasehold. In his report the master referred to the fact that the record in the earlier bankruptcy proceeding disclosed a claim filed by the landlord, upon which dividends had been paid, for expenditures in restoring a party wall and closing up a common entrance in the leased building based upon the debtor's agreement to restore it at the expiration of the term, which was again asserted in the present proceeding. He thus commented upon this situation: 'Naturally, the entire basis of this claim for restoration is the expiration of the lease. The Trustee may well point to it, as showing that the Landlord, prior to the enactment of section 77B, by her re-entry and reletting of the premises as aforesaid, considered that the lease terminated and expired.'

The District Court approved the master's report and rejected the claim; and the Circuit Court of Appeals affirmed,² holding that the injury specified in section 77B(b)(10), 11 U.S.C.A. § 207(b)(10) for which a claim by a landlord is allowable can only be such injury as would found an action under applicable state law. The court concluded that although according to the law of New Jersey the re-entry and reletting did not effect a surrender, the restoration of the building was such an assertion of dominion by the landlord as to deprive her of any further claim against the tenant.

The parties differ with respect to the correctness of the Circuit Court of Appeals' interpretation of the law of New Jersey. They also disagree as to whether the record supports the finding that the landlord restored a portion of the leased building. The disputes need not be resolved if the petitioner is right in asserting that, within the purview of section 77B, the lessor was a person injured by the rejection of the lease who is accorded a provable claim against the debtor's estate for the injury, notwithstanding the re-entry, reletting, and restoration of the premises, after rejection of the lease, consummated a surrender of the leasehold, and ended the tenant's liability under the local law. As section 77B supplements and extends the bankruptcy system in force at the time of its enactment, we shall examine the question in the light of the old law, the supposed mischief arising under it and the alterations made by the later act.

1. Section 63a of the Bankruptcy Act of 1898³ stated what claims should be provable in bankruptcy. The section gave a landlord no provable claim for rent to accrue after the trustee's rejection of a lease. The tenant's liability for future rent was not discharged and remained enforceable as installments of rent fell due. This was necessarily so, since future rent is demandable only in the amounts and at the times named in the lease and the total cannot be recovered at law in a lump sum in advance of accrual of the installments. This state of the law involved elements of hardship to both lessor and lessee. In the case of a corporate, and often in that of an individual lessee, the landlord's right to collect rent from a bankrupt tenant was valueless. On the other hand, if the landlord, notwithstanding rejection by the trustee, was compelled by its terms, or elected pursuant to its provisions, to treat the lease as still in force, he might throughout the remainder of the term harass the discharged bankrupt by successive actions for accruing rent and so retard or prevent the debtor's financial rehabilitation which the statute was intended to aid.

Many leases provide for the termination of the tenant's estate upon his adjudication as a bankrupt, by the lessor's re-entry. Under the old law such termination did not give rise to a provable claim for future rent, or for damages, or for indemnity. Not uncommonly lease agreements, in addition to stipulation for termination of the leasehold upon the tenant's bankruptcy, provide that the bankrupt shall indemnify the landlord for loss of future rent. These provisions vary in their terms, some requiring the rendition of indemnity as each installment of rent falls due, others at the end of the term when the full difference between the rent reserved and that received upon reletting can be ascertained. Under section 63a of the Act of 1898 such covernants did not support a provable claim, as the obligation to indemnify ripened after adjudication. The consequence was that liability under this sort of covenant was not discharged and remained to haunt the bankrupt.

As early as 1932 proposals were brought forward in Congress for the broadening of the bankruptcy system to authorize proceedings for the reorganization of business corporations. Bills authorizing proceedings in courts of bankruptcy to that end failed of passage in the 72d and 73d Congress. H.R. 5884, 73d Congress, Second Session, which ultimately became law as section 77B of the Bankruptcy Act was under consideration when the decision in Manhattan Properties, Inc., v. Irving Trust Company, 291 U.S. 320, 54 S.Ct. 385, 78 L.Ed. 824, threw into high relief the plight in which landlords found themselves as a result of the flood of corporate bankruptcies brought about by the economic depression. The situation of owners of business properties leased to chain store organizations which had resorted to voluntary bankruptcy largely as a lever to force revision of leases was the subject of comment in and out of Congress. By the same act section 6oa was amended (48 Stat. 923, § 4(a), 11 U.S.C.A. § 103 and note) to give a provable claim to a landlord whose lease had been rejected by a trustee in bankruptcy and a similar provision was incorporated in 77B, the new reorganization section. This history cannot be ignored in construing the supplemental legislation.

2. The purpose of section 77B was to facilitate rehabilitation of embarrassed corporations by a scaling or rearrangement of their obligations and shareholders' interests, thus avoiding a winding up, a sale of assets, and a distribution of the proceeds. A salient element in such a reorganization is the discharge of all demands of whatsoever sort, executory and contingent, presently due or to mature in the future. Of such claims not the least important are those for rent to accrue under a lease, or for damages or indemnity payable because of the termination of a leasehold. Obviously if such obligations are to be discharged they must be made provable, for they cannot be destroyed. How, then, did the Congress deal with them?

The pertinent provisions of section 77B are copied in the margin.⁴

Clause 10 renders provable claims upon covenants of indemnity maturing upon re-entry after adjudication. The term 'creditors' is made to include 'holders of claims of whatever character against the debtor or its property, including claims under executory contracts, whether or not such claims would otherwise constitute provable claims under this Act (title).' Bankruptcy of the obligor is an anticipatory breach of an executory contract and a claim for damages for the breach was provable under section 63a of the Act of 1898.⁵ One having a demand against a debtor whose affairs are in the hands of an equity receiver, if the claim matured after the receiver's appointment but before the...