Source: http://supreme.justia.com/cases/federal/us/299/433/case.html
Timestamp: 2013-05-25 12:35:25
Document Index: 763865620

Matched Legal Cases: ['§ 77', '§ 77', '§ 77', '§ 77', '§ 63', '§ 77', '§ 77', '§ 77', '§ 63', '§ 77', '§ 77']

City Bank Farmers Trust Co. v. Irving Trust Co. - 299 U.S. 433 (1937) :: Justia US Supreme Court Center
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Case	U.S. Supreme CourtCity Bank Farmers Trust Co. v. Irving Trust Co., 299 U.S. 433 (1937)City Bank Farmers Trust Co. v. Irving Trust Co.No. 260Argued December 16, 1936Decided January 4, 1937299 U.S. 433CERTIORARI TO THE CIRCUIT COURT OF APPEALS
Certiorari was granted in this and three following cases, involving the construction and validity of provisions of § 77B of the Bankruptcy Act, [Footnote 1] which enlarge the category of provable claims to include one by a landlord for injury due to rejection of a lease, or for damages or indemnity under a lessee's covenant. Page 299 U. S. 435
The special master who heard the cause recommended disallowance of the claim in the view that § 77B did not, and could not, create any valid and legal claims against the debtor where none existed anterior to the enactment of the section, and held that none existed before its adoption because, by the law of New Jersey, the landlord's reentry and reletting worked a surrender of the leasehold. In his report, the master referred to the fact that the record in the earlier bankruptcy proceeding disclosed a claim filed by the landlord, upon which dividends had been paid, for expenditures in restoring a party wall and closing up a Page 299 U. S. 436 common entrance in the leased building based upon the debtor's agreement to restore it at the expiration of the term, which was again asserted in the present proceeding. He thus commented upon this situation:
The parties differ with respect to the correctness of the Circuit Court of Appeals' interpretation of the law of New Jersey. They also disagree as to whether the record supports the finding that the landlord restored a portion of the leased building. The disputes need not be resolved if the petitioner is right in asserting that, within the purview of § 77B, the lessor was a person injured by the rejection of the lease who is accorded a provable claim against the debtor's estate for the injury, notwithstanding the reentry, reletting, and restoration of the premises, after rejection of the lease, consummated a surrender of the leasehold, and ended the tenant's liability under the local law. As § 77B supplements and extends the bankruptcy system in force at the time of its enactment, we Page 299 U. S. 437 shall examine the question in the light of the old law, the supposed mischief arising under it, and the alterations made by the later act.
Many leases provide for the termination of the tenant's estate, upon his adjudication as a bankrupt, by the lessor's reentry. Under the old law, such termination did not give rise to a provable claim for future rent, or for damages, or for indemnity. Not uncommonly, lease agreements, in addition to stipulation for termination of the leasehold upon the tenant's bankruptcy, provide that the bankrupt shall indemnify the landlord for loss of future rent. These provisions vary in their terms, some requiring the rendition of indemnity as each installment Page 299 U. S. 438 of rent falls due, others at the end of the term when the full difference between the rent reserved and that received upon reletting can be ascertained. Under § 63a of the Act of 1898, such covenants did not support a provable claim, as the obligation to indemnify ripened after adjudication. The consequence was that liability under this sort of covenant was not discharged, and remained to haunt the bankrupt.
2. The purpose of § 77B was to facilitate rehabilitation of embarrassed corporations by a scaling or rearrangement of their obligations and shareholders' interests, thus avoiding a winding up, a sale of assets, and a distribution of the proceeds. A salient element in such a reorganization is the discharge of all demands of whatsoever sort, executory and contingent, presently due or to mature Page 299 U. S. 439 in the future. Of such claims, not the least important are those for rent to accrue under a lease, or for damages or indemnity payable because of the termination of a leasehold. Obviously, if such obligations are to be discharged, they must be made provable, for they cannot be destroyed. How, then, did the Congress deal with them?
The pertinent provisions of § 77B are copied in the margin. [Footnote 4] Page 299 U. S. 440
Since, in the instant case, the lease contains no such covenant, in the absence of some further provision respecting landlords' claims, the petitioner would be without remedy under § 77B, as it would have been in strict bankruptcy Page 299 U. S. 441 proceedings under § 63a of the Act of 1898 until that section was amended in 1934. There is, however, a further provision:
Although, as we have noted, under the Act of 1898, rejection by the trustee was not a breach of the lease, it left the premises in the possession of an impecunious tenant with the virtual certainty they would be thrown back upon the landlord's hands untenanted. If the owner could not turn his property to account on terms as favorable as those embodied in the rejected lease, obviously he suffered an injury. Page 299 U. S. 442
3. Like any other provable claim, that of a landlord for injury resulting from rejection of the lease, or for damages or indemnity for termination of the tenure, may, for an adequate consideration, be released. Schwartz v. Irving Trust Co., 299 U. S. 456. The lease, moreover, may contain stipulations, fulfillment of which is to be full compensation for any loss due to termination of the leasehold, Page 299 U. S. 443 and thus bar any claim under 77B for the landlord's loss. Meadows v. Irving Trust Co., 299 U. S. 464.
Plainly the word "reentry" is used to describe a case where the landlord, treating the bankruptcy as a breach of the lease, reenters for condition broken. Whether the other phrase, "surrender of the premises to the landlord," denotes the technical surrender which drowns the particular estate in the reversion, or the mere tradition to, and acceptance by, the landlord of possession, is immaterial. The amount of the landlord's claim for the loss of his lease necessarily is the difference between the rental value of the remainder of the term and the rent reserved, both discounted to present worth. This, we have said, is a method of liquidation familiar and fair. It was the method adopted under § 77B in Kuchner v. Irving Trust Co. et al., 88 F.2d 35, the judgment in which is this day affirmed. Post, p. 299 U. S. 445. If the landlord must give credit for the present rental value of the premises, he is Page 299 U. S. 444 entitled to avail himself of them for realization of that value, and this he cannot do without reentry and reletting. If he must give such credit, he surely has the option to attempt recoupment of his loss by occupying the premises for the remainder of the term. But such occupation, under the law of most of the states, amounts to a complete termination of the leasehold, and deprives the landlord of any further rights as lessor. It is evident that, if a lease be rejected, the subsequent repossession of the demised premises and acts of control and dominion do not destroy the provability of a claim under § 77B.