In re Hays, Foster & Ward Co.

• Citation: 117 F. 879
• Parties: In re HAYS, FOSTER & WARD CO.
• Decision Date: 13 October 1902
• Court: U.S. District Court — Western District of Kentucky

117 F. 879

In re HAYS, FOSTER & WARD CO.

United States District Court, W.D. Kentucky.

October 13, 1902

J. D Moquot, for petitioner.

EVANS District Judge.

Max B Nahm filed a claim in this proceeding for a balance of rent alleged to be due him upon a lease of certain premises. The referee having disallowed the claim, a petition has been filed for a review of that action. The material facts appear to be as follows: (1) On the petition of certain creditors filed May 28, 1900, alleging that on May 1, 1900, the bankrupt had made a general assignment for the benefit of all his creditors, the corporation was adjudged bankrupt on June 22, 1900. (2) On the 14th day of July, 1900, J. W. Campbell was chosen trustee. (3) The bankrupt corporation was tenant for a term of five years, beginning May 10, 1898, of certain premises in Paducah, Ky., belonging to the claimant, Max B Nahm. The rent was payable monthly, and a separate note for $137.50 was given for each month's rent. (4) A. W. Foster had been named as assignee in the deed of assignment referred to in the petition. While in possession, as such, of the leased premises, and of the stock of merchandise belonging to the bankrupt, on May 10, 1900, upon the alleged consideration that Nahm should refrain from suing out an attachment for his rent, he consented to deposit and did deposit in the American German National Bank, as security therefor, the sum of $3,000. Subsequently this sum of money was turned over to the trustee in bankruptcy. (5) Before the petition was filed, and, of course, before the adjudication in bankruptcy, namely, on May 10, 1900, and possibly notwithstanding the deposit of the $3,000, the landlord, Nahm, exercised a power reserved under the lease, and declared a termination of the tenancy as of May 10, 1901. (6) Foster, the assignee under the general assignment, converted all the property into cash, and he or his subtenants occupied the premises from May 1, to August 10, 1900, and paid the rent accruing to the landlord for that period. (7) The trustee in bankruptcy never used or occupied the premises in any way, but refused to do so, or to accept the keys to the buildings thereon. (8) Immediately after the election of Campbell as the trustee in bankruptcy, the landlord demanded of him the balance of the year's rent, namely, $1,237.50, though no part of it was then due. (9) On the 22d day of October, 1900, the landlord, leaving outstanding the other notes maturing in subsequent months, rented the premises to another satisfactory tenant, but now claims from the trustee $330, the rent alleged to have accrued between August 10 and October 22, 1900,-- all, of course, after the adjudication on June 22, 1900, and for all of which the landlord held the promissory notes of the bankrupt. Whether that particular rent shall be paid out of the bankrupt's assets, and as a preferred claim, is the only question to be decided.

The question thus raised is the same as that involved in the case of In re Jefferson (D.C.) 93 F. 948, 2 Am. Bankr. R. 206, where, after very careful consideration of it, both upon principle and the authorities, the court reached the conclusion that, where the tenant is adjudged to be bankrupt, the relation of landlord and tenant, ipso facto, comes to an end, and consequently that there cannot, under section 63, be a 'provable debt' against the bankrupt's estate for rent alleged to have accrued after the date of the adjudication. From that time on there is no tenant, and no one to perform the duties or discharge the obligations of a tenant; the bankruptcy act, in prescribing the duties and authority of a trustee, not making it one of them, and reason and the principles of law not of themselves impressing that duty upon the office of trustee in bankruptcy. The reasoning upon which the court reached its conclusion is quite fully stated in the opinion in that case, and need not now be repeated at much length. The views then expressed do not seem to have met the approval of Judge Lowell, as shown in his opinion in the case of In re Ells (D.C.) 98 F. 967, though the accuracy of his deductions seems to have been doubted by the circuit court of appeals of the Fifth circuit when it considered the case of Atkins v. Wilcox, 44 C.C.A. 626, 105 F. 598, 53 L.R.A. 118. But not only is the conclusion reached in the Jefferson Case supportable upon just principles and the cases cited in the opinion then delivered, but the precise question was ruled the same way by Judge Purnell in Bray v. Cobb (D.C.) 100 F. 270. The authorities referred to in the Jefferson Case as maintaining the proposition therein announced were the cases of Bailey v. Loeb, 2 F. Cas. 376, decided in 1875 by Mr. Justice Woods; In re Webb, 29 F. Cas. 494, decided by Judge Ballard of this court; and In re Breck, 4 F. Cas. 43. Other judges have probably expressed opinions upon the subject one way or another since the present law was passed. This conflict has led me to reexamine the question with much industry.

The rule announced in the Jefferson Case is, I think, upon the whole, beneficial to the landlord, inasmuch as, although in some instances he might find on the premises property sufficient to meet the demand for rent, in most others this would probably not be the case; but in every instance, if that rule be sound, he would have the right promptly to find a new tenant, and could do so more advantageously than any one else, being more interested. Section 64b, cl. 5, of the bankruptcy act, gives priority of payment to any person who by the laws of the United States or of the state is entitled to priority. Probably the word 'person,' in this connection, should also be construed to mean 'claim,' but the laws of Kentucky (Ky. St. c. 75) do not give a landlord's demand for rent any absolute right to priority of payment. What the Kentucky law does is to create a 'lien' upon certain property found upon the leased premises, which the bankruptcy act preserves and effectuates. If there is no such property, there is no lien to enforce; and, if the claim for rent is a 'debt,' it must stand in the position of other debts, even though evidenced by notes, and must take its chances of pro rata payment upon the same basis as ordinary claims. This result is not changed by a general assignment. Ky. St. Sec. 74. A demand for rent not being entitled to any priority of payment except through a lien given by the statute upon property, if there is no property for it to operate upon such a demand must range with other simple-contract debts; and, though the trustee in bankruptcy owned the leasehold, the landlord then could only prove the debt evidenced by the notes for rent, and could only obtain thereon payment pro rata with other unsecured creditors, thus imposing upon the trustee possession of premises he neither wanted nor needed, and upon the landlord the loss of most of the rent which might accrue subsequent to the adjudication. These illustrative suggestions point out how much better for all parties is the general rule acted on in the Jefferson Case, which enforces the payment of rent up to the adjudication, and leaves the premises free to the owner thereafter. Of course, if the trustee uses them, he makes the trust estate liable for the value of such use; but this is because he was in possession and actually used the property, and not because of the previous tenancy of the bankrupt. These considerations of advantage or convenience should not, however, modify or control the operation of those logical principles which should govern the court in determining the question. As I conceive it, the true grounds upon which the decision must rest are that after the adjudication the landlord has no tenant; that the bankrupt thereafter is legally impotent to be such; that the trustee, not having by law any power to continue to conduct the business, has ordinarily no use for the leased premises, and has no authority under the statute to be the tenant in substitution for the bankrupt, though, if necessary to carry on his business of selling the trust assets, as distinguished from that which had been carried on by the bankrupt, he may rent the old premises or new, at his option, and pay the cost thereof as part of the expenses of administration. Under these circumstances there is no 'fixed liability' for a demand 'absolutely owing' to the landlord at the time of the adjudication, except for the rent which had accrued or been earned up to that date; and certainly, in the nature of the case, no such debt can accrue against the bankrupt after the adjudication, and, if not, it cannot be proved against his estate as one of his debts. Section 63. There...