In re Wil-Low Cafeterias, 255.

• Decision Date: 08 April 1940
• Docket Number: No. 255.,255.
• Citation: 111 F.2d 83
• Parties: In re WIL-LOW CAFETERIAS, Inc. SIEGEL v. SCHULTE.
• Court: U.S. Court of Appeals — Second Circuit

111 F.2d 83 (1940)

In re WIL-LOW CAFETERIAS, Inc. SIEGEL v. SCHULTE.

No. 255.

Circuit Court of Appeals, Second Circuit.

April 8, 1940.

Otterbourg, Steindler & Houston, of New York City (Aaron Rosen and Arnold A. Jaffe, both of New York City, of counsel), for appellant.

Jerome Eisner, of New York City (Julius B. Sheftel, of New York City, of counsel), for appellee.

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

SWAN, Circuit Judge.

The appellant is the trustee in bankruptcy of Wil-Low Cafeterias, Inc., which filed a petition for reorganization under section 77B of the Bankruptcy Act, 11 U. S.C.A. § 207, and was continued in possession of its property until June 7, 1938, when liquidation was ordered and the trustee appointed. The appellee is the landlord of premises leased to Wil-Low Cafeterias, Inc. and occupied by it as debtor in possession until the appointment of the trustee who transferred the leasehold to a purchaser. The purchaser, however, vacated the premises in August 1938 and paid no rent after July. The landlord thereafter filed a priority claim against the debtor's estate for (1) unpaid rental of $167.72 for the period from June 1 to June 7, 1938 and (2) unpaid rental for the period from August 1, 1938 to April 30, 1939, the expiration of the term. The referee in bankruptcy allowed priority to only the first item, and reserved the second as a general claim which the trustee might still dispute. The district court adjudged that the entire claim was entitled to priority on a parity with other administration expenses, but referred back to the referee determination of its exact amount. From this order the trustee has appealed.

The premises in question were held by the debtor under two subleases from the claimant-appellee which was itself a tenant and a debtor in reorganization proceedings. Each sublease ran for a term ending April 30, 1939, and contained a prohibition against assignment without the landlord's written consent. The aggregate yearly rental was $11,750. The debtor in possession paid the rent at this rate through February 1938, pending determination whether to adopt or reject the leases. In March 1938 an agreement was made between the claimant and the debtor ("individually and as debtor in possession") reducing the rent to the rate of $8,500 per annum, payable in equal monthly instalments in advance from March 1, 1938 to April 30, 1939. The agreement provided that it was to be inoperative until its execution had been approved by an order entered in the debtor's reorganization proceedings, and that, subject to such court approval, the debtor "shall and does hereby affirm and adopt said subleases held by second party, as modified as aforesaid." There were also provisions recognizing that if a plan of reorganization should be confirmed and the subleases assigned, pursuant to the plan, to a corporate assignee which should assume the obligations of the subleases as modified by the agreement, the debtor should be released from all obligations to be performed by the tenant subsequent to the assignment. This was followed by a provision that the foregoing right of assignment shall only enure to the benefit of the debtor, "and no other assignment of said subleases, except with the express written permission of the landlord, shall be valid." The fourth paragraph of the agreement provided that if the overlease should be affirmed and disposed of, or disaffirmed in the Schulte reorganization, the debtor would attorn to the transferee or the overlandlord, and D. A. Schulte, Inc., should be released from all obligations in respect to the subleases. By its order of April 8, 1938 the bankruptcy court "ratified and approved" the agreement and authorized the debtor "to affirm the leases as modified by the aforesaid agreement." The debtor in possession paid rent at the modified rate for the months of March, April and May, 1938. Shortly after his appointment on June 7, 1938, the trustee notified the claimant that he had parted with possession of the premises and would make no payment for rent or occupation after June 8th. Pursuant to an order of the referee in bankruptcy the trustee sold the subleases, with the fixtures and restaurant equipment in the premises, and executed a bill of sale to the purchaser dated June 21, 1938. By letter dated June 24, 1938 the claimant was notified by the trustee's attorneys that the trustee had vacated the premises as of June 20, 1938, turned over possession to the purchaser of the debtor's assets, and disaffirmed all leases. Such disaffirmance was authorized by an order of the referee dated June 25, 1938. After paying rent to the claimant for part of June and for the month of July the purchaser vacated the premises. The claimant did not find a new tenant.

The main dispute is whether the agreement above described constituted a new lease by the debtor in possession, made with the approval of the court, or was merely a modification of the subleases and an adoption of them as modified. The referee took the latter view; the district judge the former.

A debtor continued in possession by court order is a court officer analogous to a receiver or trustee. In re Avorn Dress Co., 2 Cir., 79 F.2d 337; In re Walker, 2 Cir., 93 F.2d 281, 283. Had the debtor in possession adopted the subleases without any modifying agreement, it would have been liable on covenants running with the land so long as it remained in...