Palmer v. Palmer

• Decision Date: 08 May 1939
• Docket Number: No. 218.,218.
• Citation: 104 F.2d 161
• Parties: PALMER et al. v. PALMER et al.
• Court: U.S. Court of Appeals — Second Circuit

104 F.2d 161 (1939)

PALMER et al. v. PALMER et al.

No. 218.

Circuit Court of Appeals, Second Circuit.

May 8, 1939.

Robert G. Dodge, of Boston, Mass., Oscar M. Shaw, Sp. Counsel, of Boston, Mass. (R. Ammi Cutter and Allen O. Eaton, both of Boston, Mass., of counsel), for appellants.

Hermon J. Wells, of New Haven, Conn. (J. H. Gardner, Jr., and Herbert H. Corbin, both of New Haven, Conn., of counsel), for appellees.

Before L. HAND, SWAN. and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

The Recovery of the Rentals and the Operating Deficit.

This appeal concerns the allowance of certain items in an account, filed by the trustees in reörganization of the New York, New Haven & Hartford Railroad Company with themselves, as trustees in reörganization of the Old Colony Railroad: it will be convenient to speak as though the two roads, instead of their trustees, were the parties concerned. The first item in dispute is a debit against the Old Colony for rentals, paid between October 23, 1935, the day on which the New Haven filed its petition for reörganization under § 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, and June 3, 1936, that on which the Old Colony did the same thing. The Old Colony had let its property to the New Haven in 1893, at a rent made up of a fixed dividend upon its shares, the interest upon its funded debts, and the taxes which might become due upon its property. In the original order which approved the New Haven's petition for reörganization, the district judge directed the trustees to pay "such sums as may be necessary to comply with the obligations of the debtor under contracts or leases", and by virtue of this authority they did pay the rent due under the lease, while they were considering whether to adopt the term. On June first, 1936, they rejected it, and, as we have said, the Old Colony went into reörganization on June third, being altogether unable to operate its railroad alone: during the whole period it had been running at a heavy deficit. The New Haven now insists that the rentals paid, and the deficit incurred since October 23d, 1935, be debited against the Old Colony and that both items rank ahead of its bondholders. On November 30th, 1935, after only one installment of that rent had been paid (the interest due upon the Old Colony bonds on December 1, 1935), the judge passed a second order that, in case any leases were eventually rejected, the "payments shall be deemed to have been made for the account of the lessors and such payments shall be recovered, set-off, or made and charged on the earnings and/or properties of the lessors prior to any mortgage or other lien thereon". This second order was served upon the president and attorney of the Old Colony, but at just what time they learned of it, does not appear, though it must of course have been after November 29th when the first installment of rent was paid. Although the Old Colony accepted all later payments without reservation, it now disputes that they are either debits against it in the account, or, if debits at all, that they are prior to the lien of its bondholders.

A lease, being property cum onere, does not pass to a trustee in bankruptcy, unless he adopts it. Copeland v. Stephens, 1 Barn. & Ald. 593; Ex parte Houghton, Fed.Cas.No.6,725, 1 Low. 554; In re Frazin, 2 Cir., 183 F. 28, 33 L.R.A.,N.S., 745. Yet if the question were to arise for the first time, it would be a little hard to see by what power the court could keep a trustee in possession while he was determining his course, without compelling him meanwhile to fulfill the conditions imposed upon the term; for instance, the payment of any rent, secured by a right of reëntry. While such ad interim payments need not, and of course would not, constitute an adoption of the term, insolvency ought not to give the lessee's creditors greater rights to possession than the lessee himself enjoyed; and if the trustee were to hold the premises even temporarily, he should be allowed to do so only upon the same terms as the lessee. This necessity should be in no sense affected by the fact that the property may be a railroad, which must in any event be operated, even when as here the lessee alone can operate it. The question does not concern the public, but is a dispute between two groups having interests in the property: it involves only the adjustment of their mutual claims upon it. Nevertheless, the contrary has been generally held; and the trustee's adoption of the term is said to "relate back" to the beginning of the proceeding, or at least to adjudication. The reason for this is not clear. It does not follow from § 70 of the Bankruptcy Act, 11 U.S.C.A. § 110, which vests the trustee's title only "by operation of law"; for title to the term vests, not by operation of law at all, but only by the trustee's adoption. Be that as it may, the trustee need not pay the rent during the probationary period, and the court will hold off the lessor, and force him to be content with the value of the use and occupation meanwhile, though ordinarily it will fix that at the same amount as the rent. This was the result in Quincy, etc., R. Co. v. Humphreys, 145 U.S. 82, 12 S.Ct. 787, 36 L.Ed. 632, and in United States Trust Co. v. Wabash Railway, 150 U.S. 287, 14 S.Ct. 86, 37 L.Ed. 1085, though so many other circumstances were thought relevant that we are not clear as to the precise scope of either ruling. But we have ourselves a number of times declared that the trustee's title "relates back", or that he is liable only for use and occupation, and in some instances what we said was necessary to the result. In Re Frazin, supra, 183 F. 28, 32; In re Sherwoods, 2 Cir., 210 F. 754, Ann.Cas.1916A, 940; Johnson v. Emerson Phonograph Co., 2 Cir., 296 F. 42, 45; Heineman Corp. v. Levy & Co., 2 Cir., 6 F.2d 970, 975; In re United Cigar Stores Co., 2 Cir., 69 F.2d 513, 515; Central Manhattan Properties v. D. A. Schulte, 2 Cir., 91 F.2d 728, 730. Whether justified in principle or note, the doctrine has by now become too well fixed to be uprooted, especially since no change was made when the whole subject was overhauled in the Chandler Act.

Strictly it might follow that when a receiver, or reörganization trustee, continues to pay rent during the probationary period without condition, the payments are voluntary, and he cannot recover them, though in the end he rejects the term. We have considered the question three times, and the results were not harmonious. In Pennsylvania Steel Co. v. New York City Railways Co., 2 Cir., 198 F. 721, 725-734, we allowed the receiver to recover on the theory that the lessor might have applied to the court to oust him, and that as it did not, we should assume that it was content to let him remain, subject to an eventual "relation back", if he rejected the term. Yet by hypothesis it would have been impossible for the lessor to recover possession, because the receiver's delay had not been unreasonable; a futile assertion of its discontent should not have been a condition upon its rights. The situation came up a second time in Second Avenue Railroad Co. v. Robinson, 2 Cir., 225 F. 734, where we took precisely the opposite position, denying any recovery to the receiver. Again we assumed that the lessor might have demanded possession, though the probationary period had not been unduly long; but this time we drew the opposite inference from that premise. The third case was Westinghouse, etc., Co. v. Brooklyn R. T. Co., 2 Cir., 6 F.2d 547, which strictly did not present the precise question, because the property had earned more than the rent paid. But we were clearly dissatisfied with the result in Second Avenue Railroad v. Robinson, supra, our whole opinion being directed towards limiting its general application. It so happens in the case at bar that the issue is important only as to the interest paid to the bondholders on November 29th, 1935, because the Old Colony had express notice by service of the order of November 30, 1935, that all later payments were conditional, and might be revoked, in case the trustees rejected the term. That certainly prevented their being voluntary, and made them recoverable, for the Old Colony upon rejection was entitled only to the value of use and occupation. But that aside, it seems to me that ordinarily at least the more consistent doctrine is not to require any such express notice to the lessor, but to say that from the very outset, dealing as he does with a receiver, he is charged with notice of the provisional character of all transactions between them. If he is relieved of liability, it is only because it would be inequitable to compel him to restore what he did not know he might be called upon to restore, when he received it; and there may indeed be cases of individual lessors who have so far adjusted their affairs in actual ignorance of the contingent nature of the payments, that it would be unfair to compel them to do this. We need not lay down an inflexible rule; for here, at any rate, such considerations are inappropriate. If the Old Colony retains even the first payment, it will merely be allowed to hold what it has no right to under the doctrine of "relation back."

We cannot however see how any of the rentals can be put ahead of the bondholders' lien. The order of November 30th, 1935, could not change the priorities ex proprio vigore, for the Old Colony and its bondholders were not then parties to the proceeding. If the bondholders had received personal notice of the terms of the order, perhaps their acceptance of the interest on their bonds might have been a surrender pro tanto of their lien; but they are not shown to have had notice. True, anyone dealing with the officer of a court is charged with notice of limitations upon his authority, but the trustees had authority to make the payments. We should have to go further, and say that they were chargeable with notice of consequences which the order attempted to impose upon...