Court Opinion

ID: 6838858
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:12:08.986323+00
Date Added: 2024-06-11T16:04:47.195525
License: Public Domain

ANDERSON, Circuit Judge
(dissenting). This is an important case. The doctrine now laid down by the majority opinion opens a wide door for schemes to nullify the Bankruptcy Aet (11 USCA).
The real case is not stated in that opinion with entire accuracy and clarity. The record is short. The only evidence is the sworn proof of claim that the bankrupt is “justly and truly indebted * * * in the sum of five thousand and 00/.100 (5,000) dollars * * * damages for broach of lease in the amount of $5,000, that being the same as the amount of rent reserved in the lease from February .15, 1928 to May 15, 1929, the end of the term. The lease under which the bankrupt occupied provided that 'the filing of any petition in bankruptcy * * * by or against the Lessee shall be doomed to constitute a breach of this lease, and thereupon, ipso facto and without entry or other action by the Lessor, this lease shall become and he terminated; and, notwithstanding any other provisions of this lease tho Lessor shall forthwith upon snch termination be entitled to recover damages for such breach in an amount equal to the amount of the rent reserved in this lease for the residue of the term hereof.’ ”
The referee simply certified “that the facts were as set forth in said proof of debt.” Neither the date nor the term of the lease is stated. For those my brethren resort to the briefs. There was no claim or ground for claim that tho provision for damages equivalent to rent could be sustained as liquidated damages because “the term of tho lease was short,” and the lessor might have expended “considerable money” in adapting tho leased property to the bankrupt’s uso. There is neither evidence nor presumption that the lessor made any such expenditure. The case presented and argued is that such provision for transmuting nonaeerued rent into damages makes a claim provable against the lessee’s bankrupt estate: Whatever the term, whenever bankruptcy comes, and without regard to actual damage suffered. Appellant’s learned counsel frankly and correctly conceded at the argument that, if this claim is provable, a like claim under a lease for 40 years, terminated by the lessee’s bankruptcy at the end of one year, would be provable. And for present purposes a lease is no different from many other kinds of contracts. Tho ruling now made would support a claim arising under a long-term contract to furnish goods, deliveries and payments to be made periodically in installments — by inserting a stipulation that the bankruptcy of tire purchaser should, ipso facto, be held a breach remitting the seller to damages equal to the price of the undelivered goods. The seller would keep his undelivered goods and have a provable claim equal to the selling price thereof. So also in a contract for personal services, running for years — the bankruptcy at any time of the employer may be made to remit the employe to a provable claim for damages equal to the remainder of his compensation for the whole period.
In this actual case and in both of the hypothetical cases, it is quite possible that the bankruptcy of the lessee, purchaser, or employer work no damage whatever to the other party. Here, for aught we know, the lessor may have immediately relet at an increased rent, after getting rent in advance for a month during which he had the premises. In the hypothetical ease of the sale of goods, the seller may have resold at a higher price the goods contracted to the bankrupt. In the hypothetical ease of personal services, the employe may have profited from the *80terminatioh of his contract and the resultant opportunity for more lucrative employment. If, in the absence of all evidence, there is any presumption that the breach of such contracts works any damage at all, there is certainly neither presumption nor probability that such damage equals the balance accruing under the contracts thus terminated, so that the supposititious victim of a breach is released from his recurrent obligations thereunder. In other words, such stipulations ground claims for damages purely artificial and having no sensible or approximate relation to the realities of the varying situations; in dominant aspects they provide for penalties assessable, not upon the party in default, but upon his creditors.
Illustrations might he multiplied indefinitely. Compare Van Iderstine v. National Bank, 227 U. S. 575, 582, 33 S. Ct. 343, 57 L. Ed. 652 ; 4 Remington (3d Ed.) § 1527.
In my view, such contracts are, on-their face and in essential nature, in fraud of future creditors of the prospective bankrupt. They are agreements by prospective bankrupts to give the other parties to these' contracts dividends belonging, in whole or in large part, to the bankrupts’ real creditors; they import intent to defraud. They contemplate padding claims in order to prevent other creditors ffrom having the benefit of the equality provisions of the Bankruptcy Act. In effect, they provide for proving false claims; for prospective bankrupt and creditor to agree that the creditor’s claim shall be magnified in order to give him assets belonging beneficially to other creditors has exactly the same effect on the rights of those other creditors as creating a claim' ab initio from nothing. Analyzed, both are attempts to get other people’s money by false representations.
In another aspect this provision was for a penalty — not for liquidated damages. The intent of the parties is only one test in the ordinary ease involving only the rights of the parties to the agreement — frequently disregarded if the result thus reached he illegal or unconscionable. 17 C. J. p. 936, and cases cited. But when, as here, the intent is, not to pay from the property of the party breaking the contract, but from property of others, the intent condemns the contract; it does not validate it. The cases cited in the majority opinion rest on the principle that parties sui juris may contract to do as they like with their own. In this case the parties undertook to contract for damages payable from an estate belonging beneficially in no part to the breaker of the contract; on adjudication the entire estate vested beneficially in the creditors. --
In another aspect, this is nothing but an agreement for proving nonaceruing rent by simply calling it damages; it assumes that the courts may be beguiled by an alias into disregarding realities. I can find no authority whatever for upholding such an obvious scheme of fraud upon the Bankruptcy Act.