Goelet v. Nat'l Sur. Co.

• Decision Date: 20 November 1928
• Parties: GOELET et al. v. NATIONAL SURETY CO. (two cases).
• Court: New York Court of Appeals Court of Appeals

249 N.Y. 287

164 N.E. 101

GOELET et al.

v.NATIONAL SURETY CO. (two cases).

Court of Appeals of New York.

Nov. 20, 1928.

Suits by Robert Goelet, individually, and by Mary R. Goelet and others, as trustees under the last will and testament of Ogden Goelet, deceased, against the National Surety Company. Judgments entered on a verdict directed by the court in favor of plaintiffs were affirmed by the Appellate Division (223 App. Div. 836, 228 N. Y. S. 802, 803), and plaintiffs appeal by permission.

Judgments reversed.

Andrews, J., dissenting.

Appeal from Supreme Court, Appellate Division, First Department.

Edward F. Clark, Leonard J. Reynolds, Roger Hinds, and Oscar B. Lowman, all of New York City, for appellants.

Bertram L. Marks and Samuel D. Cohen, both of New York City, for respondent.

CRANE, J.

This appeal involves the construction of two certain bonds given by the National Surety Company, pursuant to the terms of two leases. The premises leased were 7 and 9 East Fifty-Second street. Both leases and both bonds are alike, with the exception that in the one Robert Goelet, individually, and Mary R. Goelet and others, as trustees under the last will and testament of Ogden Goelet, deceased, are the lessors, and Mary R. Goelet is the lessor in the other. Two judgments have been entered, but, as the appeals are consolidated, I will refer to the plaintiffs as the landlord or lessor. The tenant, or lessee, is the Eldar Restaurant Company, Inc. The lease of the premises is for 10 years and 4 months, commencing on the 1st day of January, 1921, and ending the 30th day of April, 1931. The rent reserved is $8,000 a year till May 1, 1926, and $10,000 thereafter. The lessee also covenants to alter and improve the buildings at an expense of not less than $17,500. These alterations and improvements are to be such as are required to fit the premises for the transaction of the business of the lessee.

As the name of the defendant indicates, a high-class restaurant was to be conducted in the premises after the improvements were completed. Consequently, with a view, no doubt, to the temptation which the proprietor of such a place is under to make profits by selling intoxicants to patrons, and the risks incurred from such a violation of the law, another clause was added to the lease to protect the landlord from the consequences of the tenant's illegal acts. Paragraph 18 of the lease says that the lessee agrees to indemnify and save harmless the lessor from all loss, damage, or liability growing out of its failure or default ‘in the observance of and compliance with any and all laws, orders, ordinances, and statutes of the United States, * * * prohibiting the sale of any beverage containing a higher percentage of alcohol than expressly authorized by controlling statutes.’ The lease then recites that simultaneously with its execution the lessee has caused to be executed and delivered to the lessor a bond of the National Surety Company, conditioned for the payment of any such loss sustained by the lessor.

The National Surety Company executed the bond referred to in the lease and annually thereafter, up to and including the year 1924. The tenant failed to keep the covenants of its lease. It sold liquor in violation of the National Prohibition Act (27 USCA) which resulted in proceedings being instituted against it, of which both the landlord and the National Surety Company had notice. On the 18th day of February, 1924, a decree was entered in the District Court for the Southern District of New York, enjoining the Eldar Restaurant Company, Inc., from selling, keeping, or storing any liquor containing one-half of 1 per cent or more alcohol by volume in premises 7 and 9 East Fifty-Second street. The decree further gave a warning to all parties in these words:

‘That at any time during said period of one year the complainant on proof that there has been any violation of any of the terms of this decree or of the injunction hereby directed to issue or any violation of the National Prohibition Act upon said premises may apply to this court on two days' notice to the attorneys for defendants for a summary modification of this decree and of the injunction hereby directed to issue so that said decree and injunction shall provide that the premises herein described be closed for a period of one year.’

The lessee did not heed this warning, for on May 14, 1924, an amended decree was entered by the District Court, reading as follows:

‘It is further ordered, adjudged and decreed that the said restaurant or club, located as aforesaid, be not occupied or used for one year from May 14, 1924; and, subject to such instructions as may be given by the United States attorney for the Southern District of New York, the United States marshal for the Southern District of New York is directed forthwith to lock and seal all of the entrances and exits to and from the said restaurant or club and to prevent, for a period of one year from the date hereof, the occupation or use of the said premises for any purpose whatsoever.’

This decree was carried out. The lessor's premises were locked up for a year. He could not rent then or lease them for restaurant purposes. The surety company had notice of all these various steps and proceedings, as well as the landlord and tenant.

These decrees of the United States court did not absolve the lessee from its covenants to pay rent. At the time of the proceedings, however, the tenant was hopelessly insolvent, and shortly thereafter went into bankruptcy. This financial condition, no doubt, accounted for its indifference to the consequences of selling liquor to patrons. Its financial loss was nothing in comparison with that which might fall and did fall upon the landlord. This conceded insolvency of the tenant made it useless for the landlord to sue it for the rent. A judgment would have no value. The landlord might have dispossessed the tenant, but it was virtually out under the decrees of the United States court, which had closed the place for the year, and by reason of the bankruptcy proceedings which shortly followed. The tenant was through, and any proceedings taken by the landlord to dispossess it, or to collect the rent due under the lease, would have been mere waste of time and money. The law looks to the facts, and seldom requires empty formalities for the establishment of rights, in the absence of statutory requirements. And the facts here are that the lessee violated its covenant to obey the Prohibition Law, in consequence of which the premises of the lessor were padlocked and empty for one year, during which time the actual loss to...