In re Mullings Clothing Co.

• Decision Date: 14 November 1916
• Docket Number: 70.
• Parties: In re MULLINGS CLOTHING CO.
• Court: U.S. Court of Appeals — Second Circuit

238 F. 58

In re MULLINGS CLOTHING CO.

No. 70.

United States Court of Appeals, Second Circuit.

November 14, 1916

[Copyrighted Material Omitted]

Lawrence L. Lewis, of Waterbury, Conn., for appellant.

Terrence F. Carmody, William J. Larkin, Jr., and Walter E. Monagan all of Waterbury, Conn., for appellee.

Before COXE, ROGERS, and HOUGH, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

The question for this court to determine is whether a lessor has a provable claim in bankruptcy when the corporation to which he has leased votes to wind up and dissolve and secures the appointment of a receiver in proceedings for dissolution who has repudiated the lease prior to the beginning of the term and prior to the proceedings in bankruptcy.

The claimant, John B. Mullings, was the owner of a building in the city of Waterbury, in the state of Connecticut. On July 25, 1913, Mullings entered into a contract of lease with the Mullings Clothing Company by the terms of which the latter leased a portion of the building for the term of five years from the 1st day of October, 1914, for an annual rental of $12,000, which was payable in monthly installments of $1,000 each month. At the time of the execution of this lease the Clothing Company was in possession of the premises under a prior lease, which was to expire on October 1, 1914, and for which a rental of $800 a month was agreed to be paid.

On August 19, 1914, the directors of the Clothing Company voted to wind up its affairs, and two days later all the stockholders of the company petitioned the state court in Connecticut to appoint a receiver, as authorized under the statutes of the state, and prayed for the dissolution and winding up of the corporation, and such a receiver was appointed. The receiver, acting under instructions of the court which appointed him, repudiated the lease, which was to begin October 1, 1914. The lease provided that, in case the rent should remain unpaid for 10 days after the same became payable under the terms of the lease, the lease would thereby terminate, and the lessor might then recover possession in the manner prescribed by the Connecticut statute relative to summary process, and the necessity of demand on the part of the lessor for the rent and for re-entry for condition broken, as at common law, as well as to that of the actual notice to quit as required by the statute, were expressly waived by the lessee.

The receiver continued in occupation of the premises until the end of October, 1914, and paid $800 rent for that month, which was accepted by the landlord as payment in full for that month. The receiver then turned over the premises to a Mr. James, who had purchased from him the stock and fixtures of the company, and James occupied during the month of November, and paid the landlord $800 rent for the month. The keys were then turned in to the landlord, who entered and took possession. A new tenant was found for the premises, and the landlord executed a lease to him on January 28, 1915. This lease was to begin on March 1, 1915, and to run for a term of five years at an annual rental of $9,000. The rental thus obtained was $3,000 a year less than that which was to be paid under the repudiated lease.

At the first meeting of creditors after the Clothing Company was adjudicated a bankrupt, the lessor offered for proof his claim against the estate in the sum of $20,000 for breach of the contract of lease; the premises at that time not having been relet. It was objected to on the ground that the lease had been rejected by the receiver and that the claim was unliquidated. The referee disallowed the claim, on the ground that it was for rent to accrue, and therefore a contingent claim, and on the ground that there had been a surrender. Subsequently, and after the lessor had re-leased the premises for the balance of the term for $3,000 a year less rent, a supplemental petition was filed, by the permission of the referee, stating the fact of the re-lease, and asking damages in the sum of $15,000, that amount representing the difference between the rental as fixed by the original lease and the amount which the lessor was able to secure in re-leasing. The District Judge has sustained the rulings of the referee, and has dismissed both petitions for the liquidation of the claim.

The dissolution of a corporation does not terminate a lease under the modern law. In People v. National Trust Company, 82 N.Y. 283 (1880), the court, referring to the claim that the dissolution of a corporation terminated the lease and that the covenant to pay rent ceased to be obligatory, said:

'We do not regard the dissolution as having any such effect. Under the statutes of this state, on the dissolution of a corporation, its assets become a trust fund for the payment of its debts, and these include debts to mature as well as accrued indebtedness, and all engagements entered into by the corporation, which have not been fully satisfied or canceled. These cannot be canceled without the consent of the party holding them, and receivers of dissolved corporations are authorized to retain out of their assets a sufficient amount to cancel and discharge such open and subsisting engagements.'

And in 10 Cyc. 1313, speaking of the duty of a receiver of a dissolved corporation, it is said:

'He is not therefore bound, if to do so will be prejudicial to the interests of the creditors, to comply with the covenants of the lease made to the corporation by paying rent in full; but he may allow the lease to be forfeited, and allow the lessor to intervene pro interesse suo to recover his distributive share of any rents accruing prior to the date of the forfeiture.'

In Schleider v. Dielman, 44 La.Ann. 462, 10 So. 934 (1892), judgment was claimed against defendants as liquidators of the Louisiana Brewing Company for the sum of $97,209.18, which it was claimed should be paid out of the assets in the hands of the liquidators. It appears that the plaintiff had a contract with the Louisiana Brewing Company, whereby the latter agreed to furnish him with all the beer he required for bottling purposes, and to furnish bottling beer to no one else for and during a term of five years, with the right in him at his option to continue the contract in force for an additional period of five years; but prior to the expiration of the term of five years the corporation by a vote of its stockholders resolved to dissolve, and its affairs were placed in the hands of the defendants as liquidators. The plaintiff claimed the obligation of the contract remained unbroken, notwithstanding the dissolution of the corporation. In the course of its opinion the Supreme Court said:

'It cannot be doubted that the liquidation of a corporation has the immediate effect of terminating all of its purely personal obligations, and of relegating the beneficiaries thereunder to an action in damages in keeping with its covenants.'

For reasons, however, not material to the case before us, the judgment of the court below was reversed.

In Roehm v. Horst, 178 U.S. 1, 20 Sup.Ct. 780, 44 L.Ed. 953 (1899), the court held that where a contract is renounced before performance is due, and the renunciation goes to the whole contract and is absolute and unequivocal, the injured party may treat the breach as complete and bring his action at once. The year before this decision was rendered this court had announced the same principle in Marks v. Van Eeghen, 85 F. 853, 30 C.C.A. 208 (1898), in an opinion written by Judge Wallace. The doctrine had been announced in England in 1853 in Hochester v. De la Tour, 2 El. & Bl. 678. And before its adoption by the Supreme Court of the United States it had been almost universally accepted by the courts of this country.

In voting to wind up, and in taking steps to dissolve and securing the appointment of a receiver in the state court for that purpose, the corporation lessee renounced the lease and at the same time disabled itself from performing it. It put it out of its power to occupy before the time arrived for the new term to begin. And the law is well settled that, where a party to an executory contract puts it out of his own power to perform it, there is an anticipatory breach, which gives the other party an immediate right of action for the damages. Black on Rescission and Cancellation, volume 1, Sec. 210 (Ed. 1916), and the cases there cited. Hence in Lovell v. St. Louis Life Insurance Co., 111 U.S. 264, 4 Sup.Ct. 390, 28 L.Ed. 423, the Supreme Court held that, where a life insurance company had terminated its business and transferred its assets and policies to another company, this in itself authorized the insured to treat the contract as at an end, and to sue to recover back the premiums already paid, although the time for the performance of the obligation of the company had not arrived. And Mr. Justice Bradley, speaking for the court, said:

'Where one party to an executory contract prevents the performance of it, or puts it out of his own power to perform it, the other party may regard it as terminated and demand whatever damage he has sustained thereby.'

In Pennsylvania Steel Co. v. New York City Ry. Co., 198 F. 721, 744, 117 C.C.A. 503 (1912), this court held that, where a party to a contract puts it out of his power to perform it, there is an anticipatory breach, which gives the other party an immediate right of action for the damages which he sustains thereby, and that where one party is a corporation, its insolvency and the appointment of a receiver, who refuses to further perform, is such a disablement, and the breach dates from the receiver's appointment.

In the case at bar when the directors voted to dissolve the corporation, and all the stockholders united in...