Connecticut Ry Lighting Co v. Palmer In re New York, N.H. & H.R. Co.

• Decision Date: 03 January 1939
• Docket Number: No. 63,63
• Citation: 83 L.Ed. 309,305 U.S. 493,59 S.Ct. 316
• Parties: CONNECTICUT RY. & LIGHTING CO. v. PALMER et al. In re NEW YORK, N.H. & H.R. CO. Argued Nov. 10—14, 1938
• Court: U.S. Supreme Court

305 U.S. 493

59 S.Ct. 316

83 L.Ed. 309

CONNECTICUT RY. & LIGHTING CO. v PALMER et al.

In re NEW YORK, N.H. & H.R. CO.

No. 63

Argued Nov. 10—14, 1938

Decided Jan. 3, 1939.

Messrs. Talcott M. Banks, Jr., of Boston, Mass., and George W. Martin, of New York City, for petitioner.

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

Mr. Justice REED delivered the opinion of the Court.

This case poses the question of the correct measure of damages allowable to a lessor creditor of a railroad debtor for the rejection of a lease under the reorganization provisions of Section 77 of the Bankruptcy Act. The determination depends upon the meaning of the definitive clause 'to the extent of the actual damage or injury determined in accordance with principles obtaining in equity proceedings.'¹ Certiorari was granted, 305 U.S. 584, 59 S.Ct. 65, 83 L.Ed. —- under Section 240(a) of the Judicial Code, 28 U.S.C.A. § 347(a), because the case involves an important question of federal law which should be settled by this Court.

On December 19, 1906, the Connecticut Railway and Lighting Company, petitioner here, leased certain gas, electric and street railway properties for 999 years to the Consolidated Railway Company, predecessor of the New York, New Haven and Hartford Railroad Company, hereinafter referred to as the New Haven. By a subsequent assignment the New Haven was divested of everything except the transportation properties involved here. On February 28, 1910, these were transferred to a wholly-owned subsidiary of the New Haven. Some question arose in the reorganization proceedings as to the New Haven's liability on the 1906 lease after this transfer to its subsidiary. The lower court, however, held the New Haven liable as lessee, and, no attack having been made upon this ruling, we treat, without further consideration, the Connecticut Railway as a lessor and the New Haven as lessee.

The lease gave the lessor the option to terminate, on default of the lessee, and to repossess the property 'without prejudice to its right of action for arrears of rent or breach of covenant.' It contained no provision for liquidation of damages for breach of the entire lease.

The New Haven agreed to pay all taxes on the property and on the lessor's income from the property. It also paid $1,049,563.50 annually for the street railways. Of this amount, $504,975 was intended to provide for the payment of interest on the Connecticut Pailway's bonds and for payments into a sinking fund. These interest and sinking fund payments created a claim upon the lessor for the contents of the fund at the date of payment of the bonds. The arrangement looked to the cancellation of the bonds in 1951 by the New Haven's payments, and the issuance by the Connecticut Railway of new bonds in their place. The delivery to it of these bonds, the New Haven agreed, would liquidate its claim for the contents of the sinking fund. In effect the annual reserved rent would then be considerably decreased, for the interest and sinking fund payments would be for its benefit as owner of the new bonds.

On October 23, 1935, the New Haven filed its petition under Section 77 of the Bankruptcy Act. The petition was approved and the respondents were appointed trustees. On December 18, 1935, they rejected the 1906 lease with the approval of the court. On November 16, 1936, the Connecticut Railway repossessed the street railway properties.

The Connecticut Railway filed claims against the New Haven's estate for numerous items, among them damages for breach of the lease and for deficiencies in property returned. It claims $23,190,314.73 as damages for rejection of the lease. This sum is alleged to be 'the difference between the present worth of rent and of rental value for the balance of the term of the lease, liquidated by discounting at 4%.'

The District Court held that under Section 77 the lessor is a creditor for actual damages accruing from the rejection of the unexpired lease to the latest practicable date in the reorganization for presentation of lessors' claims. Damages were measured by the difference between the rent reserved in the lease and the net earnings of the property. The court allowed the amount proved up to June 20, 1937, with leave to the Connecticut Railway to apply for further hearings to liquidate damages suffered after that date.

The Circuit Court of Appeals affirmed, approving the trial court's exclusion of any future damage which had not accrued up to the latest possible hearing in the proceedings.

First. The claim for deficiencies in the property returned to petitioner is not properly before this Court. The petition for certiorari did not include the claim among the questions presented or reasons for the issuance of the writ. It was listed as one of three rulings below. The first related to rent accrued to petition filed, the second to deficiencies in property returned, and the third to damages for rejection of the lease. Nowhere in the petition was there complaint as to the first two items. Clearly the petition sought review solely of the decree in so far as it limited petitioner's claim under Section 77 for damages from rejection of the unexpired lease. As clearly, certiorari was granted to review only the matter which this Court was advised aggrieved petitioner. Johnson v. Manhattan Ry. Co., 289 U.S. 479, 494, 53 S.Ct. 721, 726, 77 L.Ed. 1331; General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, 177—179, 58 S.Ct. 849, 850, 851, 82 L.Ed. 1273. Petitioner relies upon Washington, V. & M.C. Co. v. National Labor Relations Board, 301 U.S. 142, 146, 57 S.Ct. 648, 649, 81 L.Ed. 965. Neither the language of that case nor the authorities there cited in support of the refusal to review a claim not mentioned give vitality to the suggestion of the petitioner that a mere reference in a petition for certiorari to a ruling, without a request for review, will cause its consideration.

Second. Under the Bankruptcy Act, prior to the amendment of Section 63a by the Act of June 7, 1934,² a claim for future rent was not provable.³ A covenant, however, creating a liability for damages on the filing of a petition in bankruptcy, measured by the difference between the present fair value of the remaining rent and the present fair rental value of the premises for the balance of the term, resulted in a provable claim.⁴ This condition made for inequality among both creditors and bankrupts, since recovery by claimants depended upon the artistry with which their leases were drafted and discharged bankrupts were often left with surviving claims for rent, unduly burdensome upon their efforts at self-rehabilitation.⁵ Everyone interested in bankruptcy problems had long been familiar with the future rent situation and its ramifications into the fields of anticipatory breach of executory contracts and the provability of contingent claims.⁶

During the years 1933 to 1935 the Congress dealt on several occasions with landlords' claims for future rent. The Act of March 3, 1933, made provision for the relief of individual debtors, agricultural and non-agriculatural, and for railroad reorganization. Section 75 defined creditors thus: 'The term 'creditor' shall include for the purposes of an extension proposal under this section all holders of claims of whatever character against the debtor or his property including a claim for future rent, whether or not such claims would otherwise constitute provable claims under this Act (title). A claim for future rent shall constitute a provable debt and shall be liquidated under section 63(b) of this Act (section 103(b) of this title).'⁷ Similarly the railroad reorganization section treated of future rents in sub-sections 77(b), (h) and (j), 11 U.S.C.A. § 205(b, h, j), hereafter more fully considered. By the decision of Manhattan Properties v. Irving Trust Company, on January 10, 1934, the difficulties of lessors were sharply emphasized. The Act of June 7, 1934, supplied procedure for corporate reorganization with arrangements permitting the proof of claims for future rent.⁸ These provisions have been upheld.⁹

The first provisions for proof of claims for future rent in railroad reorganizations appeared in the Act of March 3, 1933, simultaneously with the broadening of the Bankruptcy Act to include the railroads as debtors. This act included Section 74, 11 U.S.C.A. § 202, which enlarged the bankruptcy definition of creditor. For creditors of this type in railroad reorganizations, the enactment was equally broad.¹⁰ The legislative history discloses nothing as to the motives which prompted the inclusion of the language. In the Act of August 27, 1935, 49 Stat. 411, these clauses were amended to read as they now stand but again nothing has been found commenting upon the reasons for their adoption in either the original or present form. Changes of interest here from the 1933 language were proposed by the Federal Coordinator of Transportation,¹¹ but they were not deemed of sufficient importance by him to merit particular comment. The Committee on the Judiciary of the House of Representatives held hearings and reported a bill, based on the Coordinator's draft, with the language, here important, changed to the exact wording of the Act of August 27, 1935. Nothing which illumines this problem appears in the hearings¹² or committee report.¹³

The portions of the act which we must consider are as follows:

'(Sec. 77.) Reorganization of railroads * * * (b) * * * The term 'creditors' shall include * * * the holder of a claim under a contract executory in whole or in part including an unexpired lease.

'* * * In case an executory contract or unexpired lease of property shall be rejected * * * any person injured by such non-adoption or rejection shall for all purposes of this section be deemed to be a creditor of the debtor to the extent of the actual damage or injury determined in accordance with...