Source: http://supreme.nolo.com/us/299/445/case.html
Timestamp: 2019-04-24 04:06:58+00:00

Document:
In this case, we are concerned with that portion of subsection (b)(10) of § 77B of the Bankruptcy Act 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 § 77B, the bankrupt filed its petition for reorganization thereunder, which was approved by the court.
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.
in violation of the Fifth Amendment. [Footnote 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.
"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 § 63(a) of this Act, 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. . . ."
ranking on a parity with debts which would be provable under § 63(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, therefore, 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, § 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.
power, a significant difference between a property interest and a contract, since the Constitution does not forbid impairment of the obligation of the latter. The equitable distribution of the bankrupt's assets, or the equitable adjustment of creditors' claims in respect of those assets, by way of reorganization may therefore be regulated by a bankruptcy law which impairs the obligation of the debtor's contracts. Indeed, every Bankruptcy Act avowedly works such impairment. While, therefore, the Fifth Amendment forbids the destruction of a contract, it does not prohibit bankruptcy legislation affecting the creditor's remedy for its enforcement against the debtor's assets, or the measure of the creditor's participation therein, if the statutory provisions are consonant with a fair, reasonable, and equitable distribution of those assets. The law under consideration recognizes the petitioners' claim, and permits it to share in the consideration to be distributed in reorganization. The question is whether the remedy is circumscribed in so unreasonable and arbitrary a way as to deny due process.
Bankruptcy originated as a seizure of the debtor's assets for equitable distribution amongst creditors. It was akin to a taking in execution. The concept was subsequently broadened to embrace the discharge of the embarrassed debtor from antecedent debts, and to make the process available at his instance, as well as at that of his creditors. Claims not provable, since they did not participate in the avails of the bankrupt's assets, were not discharged, but remained recoverable by action against the discharged bankrupt. The object of § 77B was to extend the system to permit and facilitate the reorganization of certain types of insolvent or embarrassed business corporations. The theory of the legislation is that the extension will serve the interests of the public, the creditors, and the shareholders.
If the Bankruptcy Act was to be broadened to embrace reorganization of corporate debtors, the wisdom of relieving them of continuing liability for rent or under contracts of indemnity was apparent. And if the landlords' claims were to be discharged in the reorganization, they must be admitted to participation on an equitable basis with other claims in shaping the reorganization and in distribution of that which is to go to creditors pursuant to any plan adopted. The section therefore made such claims provable. Its legislative history attests the diverse views entertained in Congress as to the amount for which a claim should be allowed. Only after mature deliberation was the limit set at the amount fixed in the act. The reasonableness of the limitation is to be determined in the light of all circumstances Congress might properly consider.
In City Bank Farmers Trust Co. v. Irving Trust Co., ante, p. 299 U. S. 433, the peculiar and unfortunate status of landlords' claims under the Bankruptcy Act of 1898 is described. The tenant's bankruptcy removed all his assets from the reach of the landlord, and left, as the latter's only remedy, suits against an empty corporate shell or a destitute individual. In framing the reorganization statute, Congress obviously attempted to award landlords an equitable share in the debtor's assets, as, in justice, it was bound to do, since the purpose was to discharge the debtor from liability to future suits based upon the lease. It is incorrect to say that Congress took away all remedy under the lease. On the contrary, it gave a new and more certain remedy for a limited amount, in lieu of an old remedy, inefficient and uncertain in its result. This is certainly not the taking of the landlord's property without due process.
bound by the Fifth Amendment not to be arbitrary in the allotment of such share, or to discriminate between landlords and other creditors and between individual landlords. We cannot pronounce the limit set upon petitioners' claim arbitrary or unreasonable. It is well known that leases of business properties, particularly retail business properties, commonly run for long terms. The longer the term, the greater the uncertainty as to the loss entailed by abrogation of the lease. Testimony as to present rental value partakes largely of the character of prophesy and, although that value is the cardinal factor in the measure of damages for which petitioners contend, it is obvious that, since the landlord is not bound to relet the premises for the unexpired term of the lease, that factor may have little real bearing upon the realities of the case. And, in any event, the possibility of the landlord's using the premises for his own purposes, their sale, their condemnation for public use, or their loss by foreclosure renders an estimate of present rental value highly uncertain. Add to this the fact that bankruptcies multiply in hard times, and that estimates of rental value are made upon the basis of what a new tenant will pay in an era of economic depression, and the estimate becomes even more unreliable. Whatever courts, in the absence of a statutory formula, might feel compelled to adopt as the measure of damage in such a case, we cannot hold that Congress could not reasonably find that an award of the full difference between rental value and rent reserved for the remainder of the term smacks too much of speculation, and that a uniform limit upon landlords' claims will, in the long run, be fair to them, to other creditors, and to the debtor.
of the leasehold. But the rent reserved, broadly speaking, has some relationship to the value of the property and the value of a lease thereon. What the statute does is to assure at least three full years' rent to a landlord whose possible loss may exceed that amount, evidently upon the theory that, with such an allowance, the landlord stands a reasonable chance of restoring himself to as good a position as if the lease had not been terminated.
The petitioners say that, by limiting their claim, they are put upon a different basis from other creditors. A sufficient ground for the distinction is that petitioners get back their property. In other words, they have lost merely a bargain for the use of real estate, whereas merchandise creditors, lenders, and others recover in specie none of the property or money which passed from them to the debtor.
for the limitation of such claims which the Congress might adopt. We are unable to say that that which Congress did select so discriminates between individual claimants to the detriment of the petitioners as to render it unconstitutional as to them.
No. 260, decided this day.
Compare Manhattan Properties, Inc. v. Irving Trust Co., 291 U. S. 320, 291 U. S. 332.
See Hanover National Bank v. Moyses, 186 U. S. 181, 186 U. S. 188.
Kothe v. R. C. Taylor Trust, 280 U. S. 224, 280 U. S. 227.
Louisville Joint Stock Land Bank v. Radford, supra, p. 295 U. S. 589.

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