Court Opinion

ID: 6885055
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:26:04.310806+00
Date Added: 2024-06-11T16:05:41.507620
License: Public Domain

EVANS, Circuit Judge
(dissenting).
Granting, for the moment, that under the bankruptcy laws, the trustee of the bankrupt debtor, like a receiver in a court of equity is not bound by the terms of a lease such as is described in the majority opinion, but may reject it and terminate liability thereunder, there is nevertheless, a limitation or condition to said right of rejection, namely, timely action by the lessee, or the trustee. Clark on Receivers, Sec. 443.
The facts in this case fail to show either rejection or timely rejection of the lease by the trustees or their predecessors, the receivers. On the other hand, the action by them taken was, in legal effect, an affirmance of the lease.
The dates are important.
June 28, 1932, receivers were appointed for the lessee, the debtor herein.
June 28, 1932, to August 31, 1934, rent fixed in the lease was paid by the receivers.
May 26, 1936, lessor petitioned the court for an order directing the receivers to pay -the rent then past due. An answer was filed; a reference to a special master had.
December 31, 1936, the master filed his report and recommended that lessor be allowed $30,509.55 for pre-receivership unpaid rentals, as a general claim; that the rental from August 31, 1934 to March 9, 1936 be allowed as an expense of the receivership in the sum of $139,620. The receivers took no action to affirm or reject the lease, or to except to master’s report.
January 22, 1937, debtor filed, and the court approved, its petition for an adjudication under Section 77B of the Bankruptcy Act. Trustees were appointed and ordered to continue ope'ration of the property, assets, and business taken over from the receivers. This included the leased property here involved.
Four months later, May 13, 1937, the crustees filed a petition for an order, requiring the respondent to modify the terms of the lease by reducing the rental to a reasonable amount, which was to be determined by the court. Respondent answered and asked that the petition for reduction of the rent be denied and that the trustees be required to pay the amount previously found due by the master, and also for rentals accruing thereafter, none of which had been paid.
A year later, September 29, 1938, the trustees amended their petition praying in the alternative that they be authorized to abandon operation of said leased line, subject to approval by the Illinois Commerce Commission. This was alternative relief, sought only in case the rent was not reduced. This petition was referred to a master, and, while still pending on July 12, 1940, the trustees filed a second amended petition wherein they prayed in the alternative, that they be authorized “not to adopt but to reject the lease” and the court *10authorize them, if necessary, to continue operation, but solely for the benefit and account of the lessor.
The court approved the findings of the master and ordered that the trustees “not adopt, but reject the lease,” and also held that the lessor was not entitled, after the date of institution of reorganization proceedings, to recover from the debtor or trustees any contractual rent, but only such amount, if any, as might be found due on an accounting, and that for the years 1937 and 1938 on such accounting there was a deficit in excess of $116,000 charged to the lessor.
The foregoing acts, far from showing a rejection of the lease during the first four years of operation of the receiver, clearly showed a ratification of it. If any significance may be drawn from the action of the court during the period from 1932 to 1940, it is affirmative in character. For two years the receivers paid their rent. Thereafter, upon application of the lessor, the court referred the matter to a master to ascertain how much was due. The master’s report was filed, finding that lessee owed lessor under the lease, two years rent. No exception was taken to this report. This action was consistent only with an affirmation of the lease.
The same is true of the action of the court upon the appointment of trustees in bankruptcy. The court directed the trustees to continue to operate the property, assets and business taken over from the receivers. Among the assets and business operated by the receivers was the leased property in question.
More important and significant is the action of the trustees who, being fully informed, sought, not to cancel the lease, but to secure a modification and revision of the rental. This action was inconsistent with cancellation or termination, but consistent with the continuance of the lease.
Something over a year later it amended its petition and sought, as alternative relief, that if the rental was not reduced, that they be given the privilege of canceling the lease. The alternative was only in case the affirmative action modifying the lease was denied.
In the meantime, the trustees continued in possession of the property and used it, for two more years. Then, in July, 1940, the trustees filed a second amendment wherein they prayed in the alternative that they be authorized not to adopt, but to reject, the lease; however, also praying that they be authorized to continue in possession of the property and to operate it, but solely for the account of the lessor.
It is an incongruous inconsistency, a dissonance of irreconcilable repugnancy, to direct a lessee to remain in possession of the leased property and operate it and charge the deficit to the lessor and yet call such action a cancellation of the lease. It would better be described as a hybrid order wherein the terms of the lease are ratified but the obligation to pay rent is repudiated.
This was what was done. The master, on the last reference, found the lease should be terminated, but the lessee should remain in possession; the deficit from the operation, which was known to have occurred, and would occur, should be charged to the lessor.
These facts- showed ratification by the receivers. Assuming the action of the receivers was not binding on the trustees of the bankruptcy estate, a somewhat violent assumption, we meet a closer question.
The trustees were directed to take over and operate this property. Never did they ask for an out and out rejection of the lease. First they asked for a reduction in the rent. This was an act of affirmation. Then,'but only as an alternative, they asked for a rejection of the lease. Before this was acted on they amended their petition and prayed for an order to operate the property, but for the lessor’s account. The meaning of “lessor’s account” was, at this time, known to the parties. It meant the deficit from operation was to be charged to the lessor, but possession and operation were to be in the lessee as the lease provided.
There never was a disaffirmance of the lease. All acts of the lessee, as well as of the court, up to November, 1940, were acts of ratification. Likewise, the ultimate ruling of the court to the effect that the lease should be rejected, but the lessee remain in possession and operate the property, is consistent with affirmance not with rejection. It is quite inconceivable to think of a disaffirmance of a lease, yet leaving lessee in possession of the property and operating it.
I am unable, also, to agree with the majority opinion which affirms the action of the District Court on the accounting. The theory of the District Court seems to have been that the lease might be disaffirmed, yet the lessee retain possession of the property. In other words, the lessor, who ordinarily *11possesses the property after a lease is can-celled, enjoyed but one right, namely, to pay the deficit which the operation by lessee was certain to entail.
Final disposition of the accounting must turn upon whether the lease was ever validly terminated. Believing that the right to cancel the lease was lost, and also being convinced that there never was a cancellation of this lease, but merely a repudiation of the rental obligation therein, I think it should be held that the lessee is indebted to the lessor for rent from 1932 to the present time.
If we assume the lease was validly terminated in 1940, upon the application of the trustees, then the rental should be limited to the date of such order. The rental is not necessarily the sum fixed in the lease. Nor is payment by lessor to the lessee while the latter is in possession rental.
Assuming that the leased property was of no value as a going concern, it seems unconscionable that the lessee should be permitted to continue to operate it, as a feeder, and charge the deficits from its operation to the lessor, to whom lessee has refused, and still refuses, to pay past rentals or to deliver possession.
It is hardly necessary to add that I think the decree of the District Court should be reversed.