Kuehner v. Irving Trust Co

• Decision Date: 04 January 1937
• Docket Number: No. 354,354
• Citation: 81 L.Ed. 340,57 S.Ct. 298,299 U.S. 445
• Parties: KUEHNER et al. v. IRVING TRUST CO. et al
• Court: U.S. Supreme Court

299 U.S. 445

57 S.Ct. 298

81 L.Ed. 340

KUEHNER et al.

v IRVING TRUST CO. et al.

No. 354.

Argued Dec. 15, 1936.

Decided Jan. 4, 1937.

Messrs. Rollin Browne and Henry L. Glenn, both of New York City, for petitioners.

Mr. Wm. D. Whitney, of New York City, for respondents.

[Argument of Counsel from page 446 intentionally omitted] Mr. Justice ROBERTS delivered the opinion of the Court.

In this case we are concerned with that portion of subsection (b)(10) of section 77B of the Bankruptcy Act (11 U.S.C.A. § 207(b)(10), which limits the claim of a landlord for indemnity under a covenant in a lease to an amount not to exceed three years' rent.

The questions are: (1) Is the claim so limited in all events and for all purposes or is the surplus over the specified amount, though subordinated to the claims of other creditors, to have priority over the interests of stockholders or to be reserved as a liability of the reorganized corporation? (2) If the claim is limited in all events to the named amount, is the provision obnoxious to the Fifth Amendment of the Constitution?

The petitioners leased real estate to United Cigar Stores Company in 1926 for a term expiring in 1946. August 29, 1932, the company was adjudicated a voluntary bankrupt. November 14, 1932, the trustee rejected the lease and abandoned the premises. The following day the petitioners reentered and terminated the leasehold in accordance with the provisions of the lease which contained a covenant by the lessee to indemnify them against all loss of rent from such termination. Immediately upon adoption of section 77B the bankrupt filed its petition for reorganization thereunder, which was approved by the court.

The petitioners presented a proof of claim, measuring the injury resulting from the termination of the leasehold by the difference between the rental value and the value of the rent reserved for the remainder of the term. They prayed that the amount claimed be ranked on a parity with other provable debts to the extent of three years' rent and, as to the balance, be subordinated to other provable debts but awarded priority over the claims or inter- ests of the debtor's stockholders. The trustee asked that the allowance be in an amount limited as provided by the statute. Committees representing preferred stockholders and debenture holders objected to allowance of the claim in any amount, asserting the petitioners could not sue on the covenant of indemnity under the state law until the expiration of the term and, having no presently enforceable claim under state law, had none in the reorganization proceeding. The petitioners amended their pleading by adding a prayer that to the extent any portion of the claim might be held not allowable a charge be reserved against the debtor's assets for such portion in priority to any interest accorded stockholders.

The uncontroverted testimony is that the fair rental value for the balance of the term is $111,545,36. The future installments of rent to the end of the term agregate $199,237.66. A special master recommended that the petitioners' claim be allowed and liquidated at the amount of the difference between present rental value and present value of the rent reserved. He found that the sum so ascertained would be not less than the equivalent of three years' rent and recommended allowance of the claim on a parity with provable debts to the extent of three years' rent—$44,377.55—and the reservation of all questions as to the balance until the time for classification of creditors and consideration of a reorganization plan. The District Court confirmed the master's report save that it decided the claim as allowed should represent the extent of claimants' right to participate in the proceedings. Cross-appeals were taken to the Circuit Court of Appeals which held that petitioners had a provable claim, that the method adopted for the liquidation of the claim was proper, that section 77B required limitation of allowance to a sum not in excess of the three years' rent mentioned in the statute and that such limitation does not take petitioners' property without due process of law in violation of the Fifth Amendment.¹ We granted certiorari because of the importance of the questions involved.

The respondent stockholders' committee does not now deny that the petitioners have a provable claim but joins the trustee in support of the decision below that the allowance must be limited for all purposes of the proceeding to three years' rent.

We have held in City Bank Farmers Trust Company v. Irving Trust Company² that the broad definition of creditors in section 77B gives the petitioners a provable claim for breach of the debtor's covenant of indemnity. The section, however, limits the amount for which such a claim may be allowed. The relevant provision, so far as applicable to petitioners' claim is: 'The claim of a landlord * * * for * * * indemnity under a covenant contained in such lease shall be treated as a claim ranking on a parity with debts which would be provable under section 63(a) of this Act (section 103(a) of this title), but shall be limited to an amount not to exceed the rent, without acceleration, reserved by said lease for the three years next succeeding * * * the date of reentry of the landlord.' 11 U.S.C.A. § 207(b)(10).

The legislative history of this provision, and the successive alterations of its wording in both Houses of Congress and in conference, to which we are referred, cannot affect its interpretation, since the language of the act as adopted is clear. The only phrase to which petitioners point in support of their contention that the claim is to be divided into two parts, one for an amount not exceeding three years' rent, to stand on a parity with other provable claims, and the other, representing the balance, to be subordinated to creditors' claims, but preferred to the interest of stockholders, is: 'shall be treated as a claim ranking on a parity with debts which would be provable under section 63(a) (section 103(a)).' We need not consider the suggestion that the words 'on a parity' were left in the clause per incuriam when formulation of an earlier draft was altered, since, in our opinion, their presence however they came to be inserted, cannot overcome the direct mandate that 'the claim * * * shall be limited.' We agree, threrfore, with the Circuit Court of Appeals that if, upon liquidation by deduction of present rental value from the present value of rent reserved, the difference exceeds the amount of the total rent for the three years succeeding the landlord's reentry, the claim may be allowed only for that amount.

A more serious question is raised by the petitioners' insistence that thus applied the act exceeds legislative powers granted and infringes personal guaranties given by the Constitution. They say that the prescribed method will in some instances limit the amount allowed to a figure less than the landlord's actual ultimate loss, and thus partially destroy his remedy for enforcement of his contract. The resulting violations of the Constitution, they assert, are the transgression of the boundaries of the bankruptcy power vested in Congress, and the taking of their property without due process.

Is the enactment in excess of the power to legislate on the subject of bankruptcies, conferred upon Congress by Article 1, section 8, of the Constitution? Congress evidently considered the limitation imposed on claims of this class necessary or advantageous to a successful reorganization and its judgment is conclusive upon us, if the enactment is within its power.

The petitioners concede Congress has power to exclude contingent claims from proof and allowance so long as the obligations they represent are not extinguished by the statute.³ They refer, however, to the statement in Louis ville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593, 97 A.L.R. 1106, that Congress has never attempted to supply a bankrupt with capital to engage in business at the expense of his creditors, as persuasive that a statute cannot discharge a bankrupt's assets from liability for his debts but can only discharge the bankrupt from encumbrances on his future exertions.⁴ This principle, they assert, the statute violates. The short answer is that the object of bankruptcy laws is the equitable distribution of the debtor's assets amongst his creditors;⁵ and the validity of the challenged provision must be tested by its appropriateness to that end. Congress, in determining what such an equitable distribution demands, is free to establish standards of provability and measures of allowance regardless of the claimant's ability...