Queens Boulevard Wine & Liquor Corp. v. Blum

Decision Date11 June 1974
Docket NumberNo. 179,D,179
Citation503 F.2d 202
PartiesIn the Matter of QUEENS BOULEVARD WINE & LIQUOR CORP., d/b/a Gold Star Wine & Liquor, Debtor-Appellee, v. Anita BLUM et al., Petitioner-Landlord-Appellants. ocket 73-1512.
CourtU.S. Court of Appeals — Second Circuit

Robert M. Rosen, Garden City, N.Y. (Goldson, Rosen & Goldson, Garden City, N.Y., on the brief), for debtor-appellee.

Jerome I. Lessne, New York City, (Leonard Holland, and Dreyer & Traub, New York City, on the brief), for appellants.

Before MOORE, HAYS and TIMBERS, Circuit Judges.

TIMBERS, Circuit Judge:

On this appeal from an order entered in a Chapter XI proceeding in the Eastern District of New York, Orrin G. Judd, District Judge, denying a landlord's petitions and granting a debtor's petition for review of an order of a referee in bankruptcy, the sole question is whether, under the circumstances of this case, a bankruptcy court is required, pursuant to Sections 70(b) and 302 of the Bankruptcy Act, 11 U.S.C. 110(b) and 702 (1970), to enforce a conditional limitation in a commercial lease which authorized the landlord to terminate the lease in the event its tenant should file a petition for an arrangement under Chapter XI of the Act. The district court held that the bankruptcy court was not so required. We affirm.

I.

The facts are not in dispute and may be briefly summarized.

The debtor-appellee, Queens Boulevard Wine & Liquor Corp. (Queens), owns and operates a retail liquor store in Forest Hills, New York. On April 28, 1970, it entered into a seven year lease with appellant, Carol Management Company (Carol), for the premises at 103-05 Queens Boulevard. The lease was on the New York Real Estate Board's standard form for stores. It included, as Article 16(b), a bankruptcy clause. 1 This clause was amended by a typewritten addendum, Article 63. 2 The bankruptcy clause, as amended, permitted the landlord to terminate the lease within a reasonable period after institution of bankruptcy proceedings by or against its tenant upon the condition that there be no forfeiture if obligations under the lease should remain unaffected by the bankruptcy proceedings and if the tenant should continue to comply with the terms of the lease, including prompt payment of rent. The lease further provided that the landlord, at its option, could apply any or all of its tenant's $8000 security against rent due.

By March 22, 1972, Queens had failed to pay the rent due on March 1. Carol instituted a summary proceeding in the Queens County Civil Court seeking a judgment of eviction and rent arrears. On the same day, Queens filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. 701 et seq. (1970). It listed debts of approximately $370,000 and assets of approximately $73,500.

Upon Queens' application, the referee on March 27 entered an order continuing it temporarily in possession and, pending a final decree, staying the commencement and continuation of suits to enforce liens against it. This included Carol's state court summary proceeding.

Thereafter, pursuant to Carol's demands and the referee's order, Queens offered on Arpil 4 to pay all rent then due subject to obtaining a surety bond which its creditors required in order to stay its adjudication as a bankrupt. The landlord found this to be satisfactory. 3

While arrangements for obtaining the bond were underway, however, Carol received an offer to lease the store at a higher rent. By a letter dated April 21, it therefore served on Queens a notice of termination of the lease.

On May 11, having obtained the required bond, Queens tendered to Carol a certified check for the full amount of the rent then due for the months of March, April and May. Carol rejected this tender. It pressed its application to have the March 27 stay vacated and to regain immediate possession of the premises.

In an opinion filed on June 20, the referee held, among other things, that Carol had not waived its option under Article 16(b) by its demands for rent and by its April 21 letter it had effectively terminated the lease. The referee nevertheless ordered that Queens continue in possession and directed it to pay a sum equal to the rent as compensation for use and occupancy. 4

The parties filed cross petitions for review of this order. Carol sought immediate possession. Queens sought a declaration that the termination clause was invalid. While these petitions were pending, Queens' creditors tentatively accepted a plan of arrangement. The plan contemplates that Queens will remain in possession of the leased premises throughout the term of the lease. Confirmation of the plan has been adjourned pending determination of the instant petitions for review.

As a result of an infusion of outside capital, Queens presently is operating at a profit of approximately $2000 per week. It has continued prompt payments to Carol for use and occupancy of the store. In addition, pursuant to an order of the referee, it has paid to the trustee $1000 per week (such payments having totalled more than $50,000 to date) to be applied toward payment of its debts if the plan of arrangement is accepted and confirmed.

II.

Section 70(b) of the Bankruptcy Act, 11 U.S.C. 110(b) (1970), made applicable here by Section 302 of the Act, 11 U.S.C. 702 (1970), 5 provides in pertinent part that:

'an express covenant that . . . the bankruptcy of a specified party . . . shall terminate the lease or give the other party an election to terminate the same shall be enforceable.'

Carol contends that the statute requires us to reverse the district court and to award it immediate possession of the premises. Queens, on the other hand, maintains that Carol's conduct prior to its April 21 notice of termination was inconsistent with its subsequent attempt to invoke Article 16(b) and that Carol therefore is estopped from terminating the lease. In the alternative, Queens argues that a bankruptcy court, in the exercise of its inherent equitable powers, may refuse to enforce a valid termination clause if the circumstances warrant.

Courts traditionally have not favored lease forfeitures. They often have strained to construe forfeiture clauses narrowly or to find them not an 'express' convenant within the requirement of the statute. See generally 4A Collier, Bankruptcy P70.44(3), at 544-46 (14th ed. 1971). Even when such a lease covenant has been found to be valid on its face, courts have created two exceptions to mitigate the harsh consequences of what otherwise would be the absolute mandate of Section 70(b). First, some courts have held that a landlord, by conduct evidencing an intent to affirm the lease, may waive the right to terminate or be estopped from asserting it. Speare v. Consolidated Assets Corp., 360 F.2d 882, 887 (2 Cir. 1966); Davidson v. Shivitz, 354 F.2d 946, 948 (2 Cir. 1966); Matter of Frazin & Oppenheim, 183 Fed. 28 (2 Cir. 1910). Secondly, at least two courts have held and others have suggested that they are empowered to refuse enforcement of similar lease provisions of the ground that termination would work a substantial injustice to the lessee and would serve only to frustrate the basic reorganization purpose of Chapter X. Weaver v. Hutson, 459 F.2d 741 (4 Cir.), cert. denied, 409 U.S. 957 (1972); In re Fleetwood Motel Corp., 335 F.2d 857 (3 Cir. 1964). 6 Cf. In re Yale Express System, Inc., 362 F.2d 111, 117 (2 Cir. 1966); In re Penn Central Transportation Co., 347 F.Supp. 1351, 1353 (E.D.Pa.1972).

In the instant case, the referee found, and the district court accepted the finding, that there was no waiver. We may not upset such a finding unless it is clearly erroneous. In re Simon v. Agar, 299 F.2d 853 (2 Cir. 1962). True, the most common indices of waiver are absent here. At no time prior to invoking its right to terminate did Carol accept payment of rent. B.J.M. Realty Corp. v. Ruggieri, 338 F.2d 653, 654 (2 Cir. 1964). Nor did it delay unreasonably in giving notice of termination. Geraghty v. Kiamie Fifth Avenue Corp., supra, 210 F.2d at 98. Carol's conduct prior to April 21 nevertheless strongly suggests that it was willing to accept payment of rent arrears, to forgive Queens' default and to cintinue under the lease.

Carol's immediate response to the order staying the state summary proceeding was a letter to Queens dated March 31 indicating complete awareness of its right to terminate but refraining from doing so. Thereafter, on April 4, a hearing was held on Queens' application to continue in possession. Carol again made specific reference to its Article 16(b) right but stated its position as follows:

'We, of course, are looking for our rent for the months of March and April, and also we want to have our rent secured for any other months in the lease. It is our request now that the stay (of the state eviction proceedings) be lifted, or else that the money be paid.'

Pursuant to these demands and in view of Queens' willingness to comply, the referee ordered immediate payment of the rent. Carol agreed to accept payment. Because of its inability to secure the required surety bond, however, Queens temporarily was adjudicated a bankrupt and thus was unable to comply with the order. On April 7, in response to Queens' application for a stay of the bankruptcy adjudication, Carol once again demanded that the rent be paid or that the stay of eviction proceedings be vacated. 7

These demands strongly indicate that Carol initially was concerned primarily with being paid and that it intended to accept tender of the rent. Relying on this, Queens, its creditors and their attorneys worked assiduously to obtain the necessary indemnity and to formulate a satisfactory plan of arrangement. It was not until these negotiations were well underway that Carol, on April 21, sent its notice of termination; and it did so then only because it had found a new tenant willing to pay a higher rent. Moreover, Carol was...

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