In re Bonwit, Lennon & Co.

• Citation: 36 F. Supp. 97
• Decision Date: 17 December 1940
• Docket Number: No. 9262.,9262.
• Parties: In re BONWIT, LENNON & CO., Inc.
• Court: U.S. District Court — District of Maryland

36 F. Supp. 97

In re BONWIT, LENNON & CO., Inc.

No. 9262.

District Court, D. Maryland.

December 17, 1940.

Raymond S. Williams and Kenneth Ekin (Hershey, Donaldson, Williams & Stanley), all of Baltimore, Md., for trustees under will of J. Henry Miller.

Edward L. Ward, of Baltimore, Md., for Trustee in Bankruptcy.

CHESNUT, District Judge.

The extent of a landlord's proper claim for future rent under a lease terminated by the bankruptcy of the tenant, is the principal question now before the court in the above entitled case. The question arises on petitions to review the referee's order, filed both by the landlord and the trustee in bankruptcy. Counsel have been heard and the questions considered.

Prior to May 5, 1939, Bonwit, Lennon & Company, Inc., a Maryland corporation, had for some years conducted a ladies wear and apparel shop at 220-222 N. Charles Street, Baltimore City. Becoming financially involved the corporation on May 5, 1939, filed a petition for reorganization under Chapter X of the Chandler Bankruptcy Act of 1938, 11 U.S.C.A. § 501 et seq. In due course of administration in that proceeding it became apparent after a few months that no plan of reorganization would be feasible, and, to save further loss to the inventory, which was somewhat of a seasonal nature, the assets were sold as a going concern, and thereafter, the corporation being hopelessly insolvent, an order of adjudication in bankruptcy was passed.

In the course of the administration of the estate in ordinary bankruptcy, the landlord filed a claim for priority in payment of three months' accrued rent of $7200, in accordance with the Bankruptcy Act, § 64, sub. a (5), 11 U.S.C.A. § 104, sub. a (5), as affected by the Maryland statute, Art. 47, § 15a of the 1935 Supplement to Bagby's Maryland Code. The trustee in bankruptcy opposed this claim before the referee on the ground that only $4,200 was due and entitled to priority. The referee determined that the whole $7,200 was due. During the three months involved prior to the bankruptcy the tenant had paid $3,000; but more than this amount was overdue and unpaid under the lease for a prior period. The question here is whether the landlord properly applied the $3,000 so paid on account to prior accumulated rent or should have applied it to currently accumulating rent during the three months' period. The trustee in bankruptcy contends that the amounts were first applied by the landlord on account of the current monthly rent, which was $2,400 per month, who subsequently undertook to change the application to rent due for prior periods, without the consent of the tenant. The question is one of fact, as to which the referee in his memorandum of law filed February 26, 1940, said: "As previously stated, the trustee in bankruptcy asserted that $1500 had been applied by the bank to the rent for March 1939, and $1500 has been applied to the rent for April, leaving only $900 due for each of those months and thereby reducing the amount of the landlord's lien to $1800 plus $2500 ($2400) for the month of May, a total of $4200. The ledger account of the bank, however, fails to support this contention. It is unnecessary to consider whether or not the bank had a right to change its original application of the payments received prior to March 27, 1939." After full argument of counsel on this point and an examination of the exhibits, I find that the referee's conclusion in this respect is correct; and therefore the trustee's petition for review of this item is overruled, and the referee affirmed on that point.

The more important question, however, relates to the proper amount to be allowed for the landlord's claim for damages for the termination of the lease by the bankruptcy trustee. Section 63, sub. a (9), of the present Bankruptcy Act, 11 U.S.C.A. § 103, sub. a (9), under the caption of "Debts which may be proved" reads as follows:

"(9) claims for anticipatory breach of contracts, executory in whole or in part, including unexpired leases of real or personal property: Provided, however, That the claim of a landlord for damages for injury resulting from the rejection of an unexpired lease of real estate or for damages or indemnity under a covenant contained in such lease shall in no event be allowed in an amount exceeding the rent reserved by the lease, without acceleration, for the year next succeeding the date of the surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, whether before or after bankruptcy, plus an amount equal to the unpaid rent accrued, without acceleration, up to such date".

It will be remembered that until a few years ago such claims for future rent under a lease, affected by bankruptcy, were not proveable and therefore not dischargeable in bankruptcy. Manhattan Properties, Inc., v. Irving Trust Co., Trustee, 291 U.S. 320, 54 S.Ct. 385, 78 L.Ed. 824; Kuehner v. Irving Trust Co., Trustee, 299 U.S. 445, 57 S.Ct. 298, 81 L.Ed. 340. The landlord filed a claim for damages in the total amount of $98,887.91 based on the amount of the whole future rent calculated for the balance of the term, less the estimated fair rental value of the property for that period, both sums discounted at the rate of 3% per month (the rate of discount of itself being acceptable to both parties). This calculation was professedly based on the applicable principle stated in the Kuehner case, supra. The referee made certain deductions (not here important) which reduced the claim to $85,537.91. It will have been noted, however, that the statute provides that the landlord's claim for damages "shall in no event be allowed in an amount exceeding the rent reserved by the lease, without acceleration, for the year next succeeding the date of the surrender of the premises to the landlord or the date of reentry * * *, whichever first occurs, whether before or after bankruptcy, plus an amount equal to the unpaid rent accrued, without acceleration, up to such date." It was, therefore, necessary for the referee to determine the amount allowable on the basis of one year's future rent. He allowed a sum equal to the amount of rental stipulated in the lease for the succeeding year which aggregated $29,200, and added to this the sum of $1,400 on account of state and city taxes, being a portion of the latter which the tenant had agreed to pay, and discounted both sums at the rate of 3%, thus arriving at the figure to be allowed as the landlord's claim for damages, as a common creditor, in the amount of $30,156.

The landlord has petitioned to review the referee's order in this respect on the ground that the allowance should have been for three years' rental ($93,400) instead of one. The basis of this contention is that under section 202 of Chapter X, 11 U.S.C.A. § 602, of the Bankruptcy Act, under which the whole proceeding was originated, the landlord's claim for future rent "shall be limited to an amount not to exceed the rent, without acceleration, reserved by such lease for the three years next succeeding the date of the surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, whether before or after the filing of the petition, plus unpaid accrued rent, without acceleration, up to such date of surrender or reentry". It will be observed that, in this respect, the language of section 602 is practically the same as that of section 103 of 11 U.S.C.A. with the exception of the maximum period, which, in one case is three years, and in the other one. Counsel for the landlord contend that as this bankruptcy proceeding originated under Chapter X for the reorganization of the corporation, its claim for future rent should be determined by section 602 and not section 103. In my opinion the referee correctly determined that the claim must be limited to one year's rent. As the proceeding for reorganization proved to be futile and the adjudication of bankruptcy followed in due course, the applicable law therefore became the ordinary bankruptcy law which thus controls the matter. The distinction made in the two statutes with respect to the proper amount of allowance of the landlord's claim finds reasonable support in the obvious difference between reorganization under Chapter X and liquidation in ordinary bankruptcy. See Moore's Bankruptcy Manual, p. 531; In re Collins Hosiery Mills, D.C., 18 F.Supp. 89, 91; Milwaukee Postal Building Corporation v. McCann, 8 Cir., 95 F.2d 948, 950.

The trustee in bankruptcy challenges the referee's computation of the amount of one year's rent allowed to the landlord with respect to two items; one is the failure of the referee to deduct from the amount allowed the sum of $15,000 which was the estimated present fair rental value of the property. This contention proceeds on the assumption that the landlord's damages must be limited to his net loss for only one year; but this does not seem to be the proper construction of the statute which in terms allows the landlord to compute his whole loss over the whole unexpired period of the lease, but limits the proveable claim to the amount of one year's rent. Counsel for the trustee cites in support of his contention In re Jas. Butler Grocery Co., D.C., 22 F.Supp. 995, 997, but in my opinion that case does not support the position because there the unexpired period of the lease terminated by bankruptcy was for less than one whole year.

The other objection made by the trustee to the referee's computation of one year's rent creates a more difficult question. The referee allowed $1400 on account of...