In re Marshall's Garage

• Decision Date: 13 March 1933
• Docket Number: No. 177.,177.
• Citation: 63 F.2d 759
• Parties: In re MARSHALL'S GARAGE, Inc. FIRST NAT. BANK OF NORTH BENNINGTON v. SURDAM.
• Court: U.S. Court of Appeals — Second Circuit

63 F.2d 759 (1933)

In re MARSHALL'S GARAGE, Inc. FIRST NAT. BANK OF NORTH BENNINGTON v. SURDAM.

No. 177.

Circuit Court of Appeals, Second Circuit.

March 13, 1933.

Marvelle C. Webber, of Rutland, Vt., and Samuel H. Blackmer, of Bennington, Vt., for appellant.

Fenton, Wing, Morse & Jeffords, of Rutland, Vt., for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

Marshall's Garage, Inc., a corporation, was adjudicated an involuntary bankrupt on January 4, 1930. One month later the appellee, Amy L. Surdam, filed proof of claim as a creditor. In September, 1930, she filed an amended proof of claim, pursuant to leave granted by the referee in bankruptcy. To the amended proof of claim First National Bank of North Bennington, a creditor, filed objections. The district court allowed the claim in the sum of $47,286.26, and, the trustee in bankruptcy having declined to appeal, the bank was permitted to appeal from the order of allowance.

The claim as allowed is composed of two items: One of $5,186.26, being for rent accrued to the date of adjudication; the other of $42,100, being for damages for breach of contract to purchase the leased premises. The latter figure was arrived at by deducting from the contract price of $92,100 the fair market value of the property in January, 1930, which was found to be $50,000. The appellant has not challenged the allowance of the item for past-due rent. Its argument attacks only the allowance of $42,100 for breach of the contract to purchase, contending (1) that the agreement, properly construed, gave the lessee only an option; (2) that, if it were a contract, the claim for breach was not provable; (3) that, even if it were provable, the damages were incorrectly measured; and (4) that there was error in allowing the amended proof to be filed more than six months after the adjudication, contrary to section 57n of the Bankruptcy Act as amended (44 Stat. 666, 11 USCA § 93 (n).

By an agreement in writing, the appellee leased to the bankrupt for a term of ten years from October 9, 1926, at a monthly rental of $610 the premises upon which it conducted its garage business. The agreement also contained provisions by which the lessee agreed to purchase and the lessor agreed to sell the property during the term of the lease for the sum of $92,100. This was to be paid in installments of not less than $1,000 a year during the continuance of the lease, with a provision that at least $10,000 should be paid during the first five years and a like sum during the second five years; and the lessee was then to give a one-year note for the balance of the purchase price secured by a mortgage upon the property. Other clauses gave the lessee the option to pay in full and obtain a warranty deed from the lessor at any time during the continuance of the lease, if not in default in respect to rent or other obligations, and to pay $1,000 on account on the 9th day of any month and thereby obtain a reduction in subsequent monthly rental equal to interest at the rate of 8 per cent. per annum on the amount of such payment. The lessor reserved a right of re-entry for the lessee's failure to perform "any of the stipulations of this agreement on its part to be done." The agreement also provided that, if the lessee's note and mortgage were given and not paid, the lessor should, in certain conditions, foreclose by private sale, accounting to the lessee for any surplus after retaining expenses of the sale, unpaid interest, and any balance due on the purchase price. When the petition in bankruptcy was filed, nothing whatever had been paid on the purchase price, and there were overdue installments of rent. The trustee in bankruptcy elected not to assume the agreement, and gave up possession to the lessor on February 8, 1930.

The contention that the agreement granted only an option to purchase cannot be successfully maintained. In positive terms a contract to buy and sell was stated. It was "mutually agreed" that the lessee "shall purchase from said lessor" and the lessor "shall sell to said lessee, * * * the above described real estate for the sum of ninety two thousand one hundred dollars during the term hereof." Then follow provisions that the lessee "shall pay" to the lessor, "on said principal sum," not less than $1,000 a year, with a minimum of $10,000 during each five years, and shall then execute a note and mortgage for the balance of the purchase price. The lessor's obligation to deliver a deed to the lessee contemporaneously with the lessee's delivery of the mortgage is clearly implied, if not expressly covered, by the earlier option clause permitting the lessee to pay in full at any time during the term and binding the lessor to give her deed upon receipt of the sum of $92,100. These definite promissory stipulations are not nullified by the subsequent paragraph upon which the appellant so strongly relies as evidencing the parties' intention to consider the instrument as granting only an option. This paragraph reads as follows:

"In case of dispute or ambiguity this contract shall be construed in the light of the following; that the property leased has cost the lessor ninety two thousand one hundred dollars, that she is willing the lessee may purchase the same at cost during the next eleven years and that in the meantime the property shall be fully protected and that she shall receive the rent herein reserved."

The purpose of inserting it was apparently to aid construction of the preceding lengthy and somewhat technical provisions. It states the cost of the property, and thus provides an explanation of the amount of the annual rent, which was almost exactly 8 per cent. on the lessor's investment in the property, and throws light on the provision reducing the monthly rent by 8 per cent. interest on any payment on the purchase price. It carries over into the eleventh year, when the note and mortgage were expected to be outstanding, the lessee's option to accelerate payment of the balance of the purchase price represented by said note, and in this respect helps to explain the earlier ambiguous clause that "the rights of sale and purchase as herein specified, shall extend for the year covered by said mortgage, provided the mortgage is given as herein specified." But, whatever the purpose of this explanatory paragraph, it is not enough to contradict the definite promises of the lessee to buy and of the lessor to sell on the terms previously stated. Thus the agreement at bar differs radically from that construed as an option in McHenry v. Mitchell, 219 Pa. 297, 68 A. 729, 730, where it was expressly stipulated that failure of the purchaser to pay should avoid the agreement and release both parties "from all liability hereunder."

Nor can the argument prevail that the failure of the lessor to sue for the unpaid annual installments shows that the parties by their conduct interpreted the agreement as merely an option. Failure to sue cannot be construed as an admission of no cause of action. The vendor is not obliged to treat nonpayment of an installment of the purchase price as a total breach of the contract, even if he might so treat it; nor need he sue promptly for an overdue installment, save to avoid the bar of a statute of limitations.

Granting the existence of a contract of purchase and sale, the next question is whether the appellee has a provable claim for breach of contract. She relies upon the doctrine enunciated in Central Trust Co. v. Chicago Auditorium, 240 U. S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L. R. A. 1917B, 580, that bankruptcy is an anticipatory breach of an executory contract and creates a provable claim for damages, if the trustee in bankruptcy elects not to assume performance. The doctrine is applicable...