In re Sherwoods, Inc.

• Decision Date: 09 December 1913
• Docket Number: 44.
• Citation: 210 F. 754
• Parties: In re SHERWOODS, Inc.
• Court: U.S. Court of Appeals — Second Circuit

210 F. 754

In re SHERWOODS, Inc.

No. 44.

United States Court of Appeals, Second Circuit.

December 9, 1913

[Copyrighted Material Omitted]

Hastings & Gleason, of New York City (Merwyn Mackenzie, of New York City, of counsel), for petitioner.

Richard B. Aldcroftt, Jr., of New York City, for respondent.

Before LACOMBE, COXE, and ROGERS, Circuit Judges.

ROGERS Circuit Judge.

The Berghoff Brewing Association granted to Sherwoods Incorporated, a written lease for a term of years beginning February 1, 1912, at a monthly rent of $875 per month. A petition in bankruptcy was filed against the lessee on April 27, 1912, and a receiver was appointed on that day who took possession of the premises and occupied the same until June 26, 1912. Prior to the time when the receiver went into possession, the lessee had occupied, but failed to pay the rent due on March 1st, as well as that due on April 1st. Rent was payable in advance on the 1st day of each month. While the rent for the month of April was by the terms of the lease due April 1st for the entire month, the court below only charged the lessee with a proportionate part of the rent down to April 26, 1912, when the lessee ceased to occupy. The contract was a New York contract, the lease having been executed there, and the premises were situated there. The New York Code provides for an apportionment of rents in the case of the death of a person or on 'the determination of his or her interest. ' N.Y. Code Civ. Proc. Sec. 2720.

The decisions in this country are not in accord upon the question whether an adjudication in bankruptcy terminates all the contractual relations of the bankrupt so that the relation of landlord and tenant is severed. Some of the District Courts have held that it has such an effect. In re Jefferson, 93 F. 948; Bray v. Cobb, 100 F. 270. This is not the view this court has taken of the law. We have held that the tenant remains liable and the obligation to pay rent is not discharged as to the future unless the trustee elects to retain the lease as an asset. In re Roth &amp Appel, 181 F. 667, 104 C.C.A. 649, 31 L.R.A. (N.S.) 270. This we understand is the construction which the English courts have placed upon the bankruptcy act of their country and the doctrine is supported by the weight of authority as concerns our Bankruptcy Act.

There can be no doubt but that rent which has accrued prior to the date of filing the petition in bankruptcy may be proved like any other debt. In re Arnstein (D.C.) 101 F. 706; Remington on Bankruptcy, Sec. 654; Tiffany on Landlord & Tenant, vol. 1, pp. 94, 95. It is not necessary to determine whether the apportionment made of the rent in this case was based on a correct principle, as the trustee was not prejudiced thereby in the matter upon which he now asks us to pass.

It is well settled that upon the bankruptcy of the tenant, provided this does not by the express terms of the lease terminate the tenancy, the leasehold interest passes to the trustee in bankruptcy if he elects to accept it. He has a reasonable time within which the lease may be accepted. If in the meanwhile he occupies the premises, he is liable for merely the reasonable rent while so occupying, and not for the rent stipulated in the lease itself. Nevertheless the rent so stipulated should be accepted as the reasonable worth of the use and occupation, in the absence of clear showing of unreasonableness. Remington on Bankruptcy, Sec. 2135, note 57, p. 549.

On June 26, 1912, the receiver, pursuant to an order of the District Court, executed and delivered to one Ogilvie an assignment of the lease. It is asserted that the court could not empower the receiver to make the assignment. The reason assigned is based on the provisions of the Bankruptcy Act. Section 70 of the act provides that:

'The trustee of the estate of a bankrupt, upon his appointment and qualification, * * * shall * * * be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt.'

Section 2, subd. 3, grants power to--

'appoint receivers * * * in case the courts shall find it absolutely necessary, for the preservation of estates, to take charge of the property of the bankrupts after the filing of the petition and until it is dismissed or the trustee is qualified.'

This contention that the receiver could not be authorized to assign is unsound. After the receiver takes possession it may be necessary that certain kinds of property should be sold for the very purpose of preserving it or its value. In our opinion the court has full power in such cases to order a sale and that such power is implied by clause 3 of section 2 of the act as well as by clause 7 of that section empowering the court to 'cause the assets of bankrupts to be collected, reduced to money and distributed. ' In re Becker (D.C.) 98 F. 407; Loveland on Bankruptcy, 213. Moreover, authority to order a sale is expressly given to the court by General Order in Bankruptcy No. 18, cl. 3 (89 F. viii, 32 C.C.A. xx), which provides as follows:

'3. Upon petition by a bankrupt, creditor, receiver, or trustee, setting forth that a part or the whole of the bankrupt's estate is perishable, the nature and location of such perishable estate, and that there will be loss if the same is not sold immediately, the court, if satisfied of the facts stated and that the sale is required in the interest of the estate, may order the same to be sold, with or without notice to the creditors, and the proceeds to be deposited in court.'

The lease contained a provision making it the duty of the lessee to pay taxes. It provided that the lessee, its successors or assigns, should pay all taxes and assessments 'which shall or may be assessed, charged or imposed according to law * * * during the term' and pay the same within 'two months after any such * * * taxes or assessments shall become a lien upon the same demised premises, * * * and if any such taxes or assessments shall not be so paid, the amount thereof shall be added to and become a part of the month's rent becoming due and payable upon the next rent day after such default,' etc. The contention of the trustee is that inasmuch as by the terms of the lease the lessee was not obliged to pay the taxes until two months after they became a lien upon the premises, and as they did not become a lien until May 1st and were therefore not payable until July 1st there were no taxes for which the bankrupt was liable on June 26th, the date of the assignment to Ogilvie, and that the assignee became liable for them on July 1st, but that the taxes were subsequently released by the landlord by virtue of the new lease which he subsequently made of the premises.

The fact is that the tax for 1912 had been assessed on the premises prior to the bankruptcy of the lessee, and his liability to pay the same was fixed by his covenant to pay the taxes assessed during the term, and the obligation which rested on him to make the payment was one 'due and owing' at the time of the bankruptcy, although the tax was not payable until after adjudication. While taxes are not in a strict sense debts, they are so regarded in the Bankruptcy Act, and they are 'legally due and owing' on the day they are assessed, even though they may not be payable until after adjudication. In re Flynn (D.C.) 134 F. 145; In re Fisher & Co. (D.C.) 148 F. 907. So in the state courts covenants on the part of a lessee to pay taxes assessed during the term have been held to impose on the lessee the duty of paying the taxes so assessed although under the law they were not payable until the term had expired. In Craig v. Summers, 47 Minn. 189, 49 N.W. 742, 15 L.R.A. 236 (1891), the lessee covenanted to pay 'all rates, taxes, levies, or assessments on said premises during the continuance of the lease. ' The court held him liable for taxes and assessments 'duly levied, charged and confirmed' upon the property during the term, although payable thereafter. And see to the same general effect Richardson v. Gordon, 188 Mass. 279, 74 N.E. 344; Blythe v. Gately, 51 Cal. 236; Ogden v. Getty, 100 A.D. 430, 91 N.Y.Supp. 664; Vorse v. Des Moines Marble Co., 104 Iowa, 541, 73 N.W. 1064. In McManus v. Shoe & Clothing Co., 60 Mo.App. 216 (1895), the covenant was 'to pay all general and special taxes on said lot and building during the existence of the term. ' The question was whether this was intended to apply to all taxes assessed during the term, or to taxes which became payable during the term. The court held that it applied to taxes assessed during the term and not to taxes assessed prior to that date and which became payable during the term.

It is true that covenants to pay taxes run with the land and upon an assignment of the lease by a lessee an assignee becomes liable to the landlord for all taxes which may thereafter become due and payable under the terms of the lease while the assignee continues in possession of the premises. Ellis v. Bradbury, 75 Cal. 234, 17 P. 3; Fontaine v Schulenburg, etc., Lumber Co., 109 Mo. 55, 18 S.W....