Oldden v. Tonto Realty Corporation, 282.

• Decision Date: 17 May 1944
• Docket Number: No. 282.,282.
• Citation: 143 F.2d 916
• Parties: OLDDEN et al. v. TONTO REALTY CORPORATION.
• Court: U.S. Court of Appeals — Second Circuit

143 F.2d 916 (1944)

OLDDEN et al. v. TONTO REALTY CORPORATION.

No. 282.

Circuit Court of Appeals, Second Circuit.

May 17, 1944.

Julius M. Arnstein, of New York City (Dannenberg & Hazen, of New York City, on the brief), for appellant.

Sidney C. Norris, of New York City (Louis Timberg, of Brooklyn, N. Y., on the brief), for appellee.

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

CLARK, Circuit Judge.

When the bankrupt, B. Westermann Company, Inc., filed its bankruptcy petition on March 5, 1942, the Tonto Realty Corporation, although itself only a lessee from the owner of the fee, was landlord of certain space on premises 18-20 West 48th Street, New York City, under a lease with the bankrupt expiring January 31, 1948. By the time of the bankruptcy the rental had become, by adjustment, $22,769.95 per year and there was owing the sum of $4,904.38 in back rent. This latter sum, however, included rent for the month of March; and since the trustee in bankruptcy occupied the premises, along with a subtenant and at the agreed rental, until June 20, 1942, the net amount of arrears, after deducting the rent paid for the overlapping period in March, was $3,313.70. Thereafter Tonto rerented the premises at a rental substantially lower than that reserved in the lease with the bankrupt. The new tenant defaulted, however, after two months, and Tonto itself was dispossessed for nonpayment of rent to its landlord in January, 1943. It then filed a claim for back rent and for damages.

Under an "ipso facto clause" of the lease (Paragraph 21), Tonto and the bankrupt had agreed that upon the latter's bankruptcy the lease should "expire ipso facto cease and come to an end," in which event there should be due the landlord as liquidated damages a sum to be computed as therein provided representing the difference between the cash value of the future rent as reserved and the cash rental value for the balance of the term, not exceeding any limit set by a governing statute.¹ Applying the formula stated in this clause the bankruptcy referee found that the liquidated damages — before application of a statutory limitation — would be $40,307.81, from which should be deducted the sum of $3,000 held by Tonto as security under the lease,² leaving a total of $37,307.81. By amendment of the Bankruptcy Act in 1934, now § 63, sub. a(9), 11 U.S.C.A. § 103, sub. a(9), however, there were added to the allowable claims in bankruptcy claims for anticipatory breach of contract, including unexpired leases of realty, but with the limitation that a landlord's claim for damages upon the rejection of an unexpired lease or "for damages or indemnity under a covenant contained in such lease shall in no event be allowed in an amount exceeding the rent reserved by the lease, without acceleration, for the year next succeeding the date of the surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, whether before or after bankruptcy, plus an amount equal to the unpaid rent accrued, without acceleration, up to such date." Because of this statutory provision, the referee reduced the total claim as allowed to one year's rent, $22,769.95, plus back rent of $3,313.70, or $26,083.65. On the trustee's petition to review, the district court held that the $3,000 deposited as security should be deducted not from the provable claim of $43,621.51, but from the allowable claim of $26,083.65, and hence modified the referee's order to allow Tonto's claim in the sum of $23,083.65. D.C.S.D.N.Y., 51 F. Supp. 776. Both parties have appealed, the trustee contending that nothing is due except the arrears of rent, less the security, i.e., $313.70, and the creditor asserting that the deposit should be deducted from the total damages claimed, rather than from the allowable claim, and hence that the referee's, rather than the court's, computation should be followed.

The trustee's contention that no damages for breach of the lease should be allowed has as its premise the admitted fact that bankruptcy was a limitation, terminating the lease before the demised term, but requires also the further step that no provision should have been made for the payment of damages in the event of such termination. Since this is so obviously just what the parties were attempting to do in Paragraph 21, the trustee's construction of the language is tortured, to say the least, justifying the "scant consideration" of the referee and the total ignoring of the point by the court, of which the trustee so vigorously complains. Thus he asserts that there could be no damages "for the unexpired portion of the term hereby demised," since the term had expired by its terms; but the first line of the paragraph — quoted above in the footnote — shows that the "term" intended was the original term of ten years. Under the relevant state authorities, as well as the substantially identical case of In re Outfitters' Operating Realty Co., 2 Cir., 69 F.2d 90, affirmed Irving Trust Co. v. A. W. Perry, Inc., 293 U.S. 307, 55 S.Ct. 150, 79 L.Ed. 379, an express provision that bankruptcy is a breach, for which damages are provided, is concededly valid; but the attempted distinction here that the provision for damages fails because of lack of the word "breach" seems to us altogether too thin to justify thwarting so clear an intent, particularly when the paragraph does speak of "liquidated damages caused by such breach of the provisions of this lease." We are clear that Tonto had a valid claim under § 63, sub. a(9), subject to the latter's specified limitations. See 3 Collier on Bankruptcy, 14th Ed. 1941, 1898.³

The landlord's appeal, however, presents an interesting and novel question. As far as we can determine, there are no decisions prior to the present case specifically deciding whether a landlord is required to deduct the amount of security held under a lease from the total damages provided by the lease or from the total claim allowable under § 63, sub. a(9) of the Bankruptcy Act. Some consideration of the background and history of the legislation is, therefore, necessary.

The Bankruptcy Act of 1898 as originally enacted was silent as to the provability of claims for rent to accrue in the future. The courts, however, were virtually unanimous in deciding that rent destined to accrue after the filing of a petition was not capable of proof, since there was no fixed liability absolutely owing, but merely a demand contingent upon uncertain events. In re Roth & Appel, 2 Cir., 181 F. 667, 31 L.R. A.,N.S., 270; Wells v. Twenty-First St. Realty Co., 6 Cir., 12 F.2d 237; Watson v. Merrill, 8 Cir., 136 F. 359, 69 L.R.A. 719; Manhattan Properties, Inc., v. Irving Trust Co., 291 U.S. 320, 54 S.Ct. 385, 78 L.Ed. 824; In re Metropolitan Chain Stores, Inc., 2 Cir., 66 F.2d 482, appeal dismissed Malavazos et al. v. Irving Trust Co., 290 U.S. 709, 54 S.Ct. 207, 78 L.Ed. 609; In re Marshall's Garage, Inc., 2 Cir., 63 F.2d 759; In re F. & W. Grand 5-10-25 Cent Stores, 2 Cir., 74 F.2d 654, appeal dismissed Urban Properties Co. v. Irving Trust Co., 296 U. S. 658, 56 S.Ct. 81, 80 L.Ed. 469. This was not a matter of logic, but "of history that has not forgotten Lord Coke" (per Holmes, J., in Gardiner v. William S. Butler & Co., 245 U.S. 603, 605, 38 S.Ct. 214, 62 L.Ed. 505), for rationally it was most difficult to reconcile this doctrine with the generally liberal treatment in bankruptcy cases of other types of anticipatory breaches of contracts.⁴ Hence the result was often harsh as to the landlord, though it did prevent the exhaustion of bankrupt estates for disproportionately large lease claims.

Beyond the fact that landlords' claims for future rent were not provable in any event, the earlier cases also held that the bankruptcy of the tenant constituted an absolute termination of the lease, so that no further claim of any kind remained to the landlord. In re Jefferson, D.C.Ky., 93 F. 948: In re Hays, Foster & Ward Co., D.C.W.D.Ky., 117 F. 879. This rule was soon supplanted, however, by the majority view that bankruptcy had no effect at all on such claims; they were not provable, and the debtor did not receive a discharge therefrom. The landlord thus retained a valid claim for damages as long as he did not terminate the obligations of the lease by re-entering; but unless there was a specific stipulation for damages contained in the lease, a re-entry did release the tenant from liability for future rents. South Side Trust Co. v. Watson, 3 Cir., 200 F. 50; In re Gallacher Coal Co., D.C.N.D. Ala., 205 F. 183; In re H. M. Lasker Co., 3 Cir., 251 F. 53, certiorari denied Meyran v. Watt, Trustee, 248 U.S. 562, 39 S.Ct. 8, 63 L.Ed. 422.⁵ A natural consequence was that landlords sought to discover some means of protecting themselves against the event of the tenant's bankruptcy. A first expedient was the reservation in the lease of a right of re-entry in the landlord and the inclusion of a covenant of indemnity by the lessee for all loss of future rent occasioned by bankruptcy. But the courts branded this also a contingent claim incapable of proof, since at the time of the filing of the bankruptcy petition there still remained uncertainty as to whether or not the option would be exercised by the landlord. Manhattan Properties, Inc., v. Irving Trust Co., supra; In re Roth & Appel, supra; Slocum v. Soliday, 1 Cir., 183 F. 410. Resort was then had to the so-called ipso facto clause, in which the lease automatically terminates upon the filing of the petition, as exemplified by Paragraph 21 of the instant lease. This covenant eventually received judicial approval, as we have seen, in Irving Trust Co. v. A. W. Perry, Inc., supra, which was not decided until after the passage of the 1934 amendment.⁶

Although this result could be easily justified on technical legal grounds, its consequence presented distinctly unattractive elements from the standpoint of policy.⁷ It made landlords' claims depend...