In re Freeman

• Decision Date: 16 January 1943
• Citation: 49 F. Supp. 163
• Parties: In re FREEMAN et al.
• Court: U.S. District Court — Southern District of Georgia

49 F. Supp. 163

In re FREEMAN et al.

District Court, S. D. Georgia, Savannah Division.

January 16, 1943.

William A. Wells, Jr., of Savannah, Ga., for debtors.

Geo. H. Richter, of Savannah, Ga., for objecting tenant.

LOVETT, District Judge.

This is a petition for review¹ of the referee's order in a Real Property Arrangement proceeding under Chapter XII of the Chandler Act.² The petition is denied. The reasons should be stated.

One of the debtors owns a small dwelling, comparatively new, and the lot whereon it stands in Savannah, Georgia. It is subject to a mortgage. If sold under foreclosure, there would be no equity for the debtor. It was leased prior to the filing of these proceedings for a term ending November first next. Under the proposed arrangement it is to be sold at private sale for an amount that will produce $750 above the mortgage. The buyer will pay cash but his offer is conditioned on being given immediate possession. He wants to occupy the premises as a home for himself and his family. The tenant has declined to yield immediate possession. Thereupon, upon application of the debtor and order of the referee, after notice to the tenant and over his objection, the so-called lease was rejected as an executory contract.³

The referee found the lease was burdensome; that if not rejected it would prevent a sale at a profit to debtor's general estate; that the bankruptcy court had power to reject it; that the tenant might be evicted in the manner required by state law;⁴ that he should yield possession on January 1st, 1943; and he was enjoined from refusing to deliver possession after that date.

The tenant on review says: (a) the referee erred in holding the court had the power to reject the lease, (b) if legally rejected, it did not terminate the "estate" of the tenant, (c) that the tenant, therefore, can not be evicted and (d) the referee erred in issuing the injunction restraining the tenant from refusing to surrender possession on January 1st, 1943.

1. Under the Arrangement Chapters of the Bankruptcy Act executory contracts include leases and the court may permit their rejection. 11 U.S.C.A. § 706(4), 713(1). The provisions of Chapters 1 to VII of the Bankruptcy Act insofar as not inconsistent or in conflict with the Arrangement provisions are made applicable to Chapter XII. By § 110, sub. b, of Chapter VII, which relates to the title, duties, etc., of the trustee of one who has been adjudicated a bankrupt, it is provided; "Unless a lease of real property shall expressly otherwise provide, a rejection of such lease * * * by the trustee of the lessor shall not deprive the lessee of his estate."⁵ This language was added by the Act of June 22, 1938, 52 Stat. 879, the Chandler Act. See Collier on Bankruptcy, 14th Ed., Vol. 4, par. 70, 44, pp. 1238, 1239, It is argued by petitioner that if the rejection of the lease was authorized, the tenant nevertheless must be allowed to remain in possession as his "estate" includes the right of possession. What does this language mean? In liquidation proceedings, where there has been an adjudication, it means that the relation of landlord and tenant is not disturbed, but the contract of rental no longer binds either of them, and the trustee may charge and recover a reasonable rental for the demised premises until the end of the term.⁶ Generally speaking, this does not depreciate the value of the property. In case of sale by the trustee a purchaser assured of a reasonable rent for a fixed term will be satisfied, and, meanwhile, a tenant (who is an innocent party) and who may have made his business plans on the assumption he would occupy the premises for the term is not treated inequitably. But should this language be construed in the same way in an arrangement proceeding where it appears (as here) that a sale may not be made at all for fair value if the tenant remains in possession, and where no peculiar equities are asserted by the tenant? I think not. Rather, I think under such circumstances the disaffirmance of the lease renders the tenant one at sufferance or after a fixed date named by the court for vacating, one holding over. If it were otherwise, the whole purpose of the arrangement statute could be defeated by a stubborn tenant who refused to move. There is no greater sanctity about a contract of rental providing for payments monthly than there is about a contract for debt payable in the same way, i.e., a mortgage upon or deed of trust conveying real estate with monthly amortization of the debt. It is clear that in arrangement proceedings under Chapter XII the rights of such creditors may be modified or altered. 11 U.S.C.A. § 861. I see no reason why tenants of the debtor should not be treated in the same manner if the continuance of their contracts in full force prevents an equitable arrangement with creditors. If the tenant is injured by the modification of his rights he is deemed a creditor and has his remedy. 11 U.S.C.A. § 858. See also In re Greenpoint Metallic Bed Co., 2 Cir., 113 F.2d 881. To give to the word "estate" as used in § 110, sub. b, of Chapter VII the meaning petitioner suggests, viz., a right to continue to occupy the premises until the end of the term, renders the section authorizing rejection of executory contracts impotent to accomplish the ends for which it was designed. To give it that meaning creates inconsistency and conflict with the purposes of the Arrangement provisions, and where that happens Chapters I to VII are expressly made inapplicable.

2. It is also urged by the petitioner that possession can not be obtained by a summary proceeding like this, as the tenant claims adversely. It is said a plenary action only is the remedy. Courts of bankruptcy may bring in additional persons when necessary for the complete determination of a matter in controversy and may determine controversies in relation to the estate of the bankrupt. 11 U.S.C.A. § 11(6) (7). If there is a bona fide adverse claim, an independent action is required, but if the claim is merely colorable or if the trustee has actual or constructive possession, or the rights of the parties are to be determined as matters of law, the bankruptcy court has jurisdiction. And in every case the bankruptcy court has power, in the first instance, to determine whether it has actual or constructive possession.⁷ Admittedly here title is in the debtor. The tenant claims possession under a contract with, not adverse to, the debtor. It may even be said the debtor has constructive possession through his tenant.⁸ The facts are not in dispute. The rights of the parties are fixed by law. I find the contention that the tenant is an adverse claimant, in the sense we are using it, is colorable only. The referee had jurisdiction.

3. Finally it is said that the Emergency Price Control Act of 1942⁹ limits the power of a court of bankruptcy to require surrender of possession of demised property, and that eviction can be lawfully made only in the manner prescribed by that Act and the regulations issued under it.

Let us examine it. In the statement of the purposes of the Act in the first section Congress declared it to be in the interest of the national defense etc., "to prevent speculative, unwarranted, and abnormal increases in * * * rents". § 901(a). An administrator is set up, and whenever in his judgment such action is necessary or proper to effectuate the purposes of the Act he shall issue a declaration setting forth the necessity for, and recommendations with reference to, the stabilization or reduction of rents for any defense-area housing accommodations within a particular defense-rental area.¹⁰ Maximum rentals have been fixed for Savannah, Georgia, by the administrator. The Act provides further "Regulations, orders, and requirements under this Act may contain such provisions as the Administrator deems necessary to prevent the circumvention or evasion thereof". § 902(g). It is made unlawful "for any person * * * to demand or receive any rent for any defense-area housing accommodations, or otherwise to do or omit to do any act, in violation of any regulation or order" of the administrator. § 904(a). It is also made unlawful "for any person to remove or attempt to remove * * * the tenant or occupant * * * or to refuse to renew the lease * * * because such tenant or occupant has taken, or proposes to take, action authorized or required by this Act or any regulation, order", etc., thereunder. § 904(b). Aggrieved persons may have the action of the administrator reviewed by a statutory court established by the Act as the Emergency Court of Appeals in the manner provided in the Act, and the decisions of that court are reviewable on certiorari by the Supreme Court of the United States.

By a regulation issued October 22, 1942¹¹ the administrator prescribed that "so long as the tenant continues to pay the rent * * * no tenant shall be removed * * * by action to evict or to recover possession * * * or otherwise * * * nor shall any person attempt such removal * * * unless" the tenant does certain things not material here, such as refusing the landlord access to the premises, committing a nuisance on the premises, etc. There is a further regulation to the effect that "Removal or eviction of a tenant for occupancy by a purchaser who has acquired his rights on or after the effective date of the Regulation is inconsistent with the purposes of the Act and the Regulation and would be likely to result in the circumvention or evasion thereof, unless" certain required down payments on the purchase price are made by the purchaser, and three months have elapsed after the administrator issues a certificate authorizing the purchaser to pursue his remedies for removal or eviction of the tenant in accordance with the requirements of the local law.

The proposed owner-occupant here acquired his rights prior to November 1, 1942, the effective date of the Regulation.¹² He has made no application to the...