Court Opinion

ID: 6856226
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:42:31.422526+00
Date Added: 2024-06-11T16:05:09.921708
License: Public Domain

SWAN, Circuit Judge
(dissenting).
The bankrupt occupied adjoining properties in Canton, Ohio, under two leases which were identical in all material respects. The respective lessors in these leases are the appellants. Each lease recited that, pursuant to permission granted by the lessor in a similar instrument of earlier date, the lessee had made certain alterations in the building, and contained an agreement that the lessee should “at the termination of this lease or any extension or renewal” thereof restore the premises to the same condition as they were on March 23, 1926, unless directed in writing by the lessor and by the owners of the adjoining property not to do so. Each lease also contained the following clause:
“This lease shall become null and void and be at an end at the election of the Lessor in the event that the Lessee’s interest in this lease shall "be assigned to or by operation of law or otherwise shall pass to or be held by any assignee for the benefit of the creditors, or any trustee in bankruptcy or any receiver of the Lessee, and in the event that on demand in writing by Lessor, any such assignee or trustee in bankruptcy or any receiver does not within twenty-four (24) hours, after the presentation of said demand, pay all back rent due hereunder and agree to pay the rent provided for hereunder during the term that such assignee or trustee in bankruptcy or any receiver is in possession of the property leased hereunder.”
There was also a provision for termination of the lease by re-entry if the lessee should default in payment of rent, taxes, etc., and such default should continue for ten days after service of notice thereof upon the lessee. In January, 1933, extension agreements were entered into between the lessee and the respective lessors extending the term to January 31, 1934.
The claims filed by the appellants allege as to their respective leases that “said lease was in full force and effect on January 12, 1932, the date when the adjudication herein was made”; they also allege the approxi*488mate cost of restoring the premises to the condition required by the covenant of the lessee; and they pray that the claim may be liquidated and then allowed.
The covenant upon whieh these claims aré founded binds the lessee to restore the former condition of the premises “at the termination” of the lease. We shall assume that this includes a termination brought about by the lessor pursuant to the provisions of the lease as well as a termination by expiration of the term demised. Cf. In re Amstein, 101 F. 706, 709 (D. C. S. D. N. Y.). So long as the lease remains outstanding, the lessee’s obligation to restore is not an. immediate duty, nor is it an absolute one, for, if the building should be destroyed “by fire or the elements at any time during the last year of the term,” it is provided that the lease shall end and rent shall cease, and it is implicit that neither party is obliged to rebuild. The appellants’ brief presents their case on the assumption that bankruptcy terminated the lease,, and created an immediate cause of action for the cost of restoring the premises to their former condition; but this is plainly a misconstruction of its terms. The filing of a petition in bankruptcy does not end the lease, either ipso facto or at the lessor’s election ; nor does adjudication. Only if the lessee’s interest in the lease “shall pass to or be held by” the trustee in bankruptcy is the lease to be at an end, provided the lessor so elects and provided further that the trustee shall fail to pay, within twenty-four hours after written demand, all back rent due and agree to pay “the rent provided for hereunder” during the time the trustee is in possession. A bankrupt’s leasehold interest does not pass to, nor is it held by, his trustee in bankruptcy, unless the latter elects to assume the lease. Hence if the trustee renounces, the lessors have no power to end the lease under the above-quoted provision. In that event the lease would continue outstanding in the bankrupt until the lessor could terminate it by re-entry for nonpayment of rent or some other default of the lessee whieh should continue for ten days after notice thereof was served on the lessee. The record is wholly silent as to termination of the lease by either of the methods above discussed. So far as appears, the trustee may have assumed the lease and performed everything required by it, or the trustee may have renounced it and the lease may be still outstanding in the bankrupt. However, in their reply brief the appellants state that they “did make the demand required by the leases, and the trustee in fact repudiated them,” and they urge that they should be allowed to amend their claims, if necessary, and prove these facts together with the liquidation of their damages. We shall assume for purposes of further discussion that the leases have been or could still be terminated by the lessors in one or the other of the methods provided for.
When the petition in bankruptcy was filed, which is the critical date as of whieh a provable claim must exist (Zavelo v. Reeves, 237 U. S. 625, 33 S. Ct. 365, 57 L. Ed. 676, Ann. Cas. 1914D, 664), it is apparent that the claim was contingent. The date when it would become due was contingent on termination of the lease, and if, before termination, the tenant should be evicted by title paramount or the budding be destroyed within the last year of the term, no liability would ever arise. Claims based on similar covenants to restore were disallowed in McDonnell v. Woods, 298 F. 434 (C. C. A. 1), and In re Amstein, 101 F. 706 (D. C. S. D. N. Y.). See, also, In re Schulte United, 2 F. Supp. 285 (D. C. S. D. N. Y.); In re Jorolemon-Oliver Co., 213 F. 625 (C. C. A. 2). Compare In re Barton Co., 34 F.(2d) 517 (D. C. D. N. H.); Trust Co. of Georgia v. Whitehall Holding Co., 53 F.(2d) 635 (C. C. A. 5); In re Desnoyers Shoe Co., 227 F. 401, 402 (C. C. A. 7). The two eases last citad are perhaps distinguishable from those where the claims were held nonprovable; in the Whitehall Case it is said that the contract contained clauses “voiding the lease in the event of bankruptcy,” and in the Desnoyers Shoe Co. Case the lease was to cease at the option of the lessor “if the lessee becomes insolvent or bankrupt.”
The eases which have denied provability to claims based upon a covenant to restore alterations at the termination or expiration of a lease have stressed the language of section 63a (1) of the Bankruptcy Act, 11 US CA § 103 (a) (1) requiring the bankrupt’s debt to be “a fixed liability * * * absolutely owing at the time of the filing of the petition against him, whether then payable or not.” McDonnell v. Woods, supra, was decided after the Supreme Court had announced in Central Trust Co. v. Chicago Auditorium, 240 U. S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L. R. A. 1917B, 580, the doctrine that bankruptcy is an anticipatory breach of the bankrupt’s executory contracts, although it gives little or no consideration to the language of section 63a (4), 11 USCA § 103 (a) (4) whieh permits proof of a debt “founded * * * upon a contract express or implied.” That claims provable under the latter subdivision need not be abso*489lutely owing at the time of the filing of the petition is made clear by the recent opinion of Mr. Justice Stone in Maynard v. Elliott, 283 U. S. 273, 51 S. Ct. 390, 75 L. Ed. 1028. It was there held that the liability of a bankrupt as indorser of a promissory note was provable although the note had not matured at the time of adjudication. The bankrupt’s liability was therefore contingent on nonpayment at maturity of the note by the maker, who was insolvent, and on presentment and notice of dishonor at maturity by the claimant. The opinion, at page 277 of 283 U. S., 51 S. Ct. 390, 391, disapproves, with a reference to In re Roth & Appel, 381 F. 667, 31 L. R. A. (N. S.) 270 (C. C. A. 2), the argument that the limitation in subdivision a (1) of section 63 must he carried over into subdivision a (4), and at page 278 of 283 U. S., 51 S. Ct. 390, 392, it is said:
“That some contingent claims are deemed not provable does not militate against this conclusion. The contingency of the bankrupt’s obligation may be such as to render any' claim upon it incapable of proof. It may be one beyond the control of the creditor, and dependent upon an event so fortuitous as to make it uncertain whether liability will ever attach. In re Merrill & Baker (C. C. A.) 186 F. 312. Such a claim could not bo proved under the Act of 1841 although in terms permitting proof of contingent claims. Riggin v. Magwire, 15 Wall. 549, 21 L. Ed. 232. Or, the contingency may be such as to make any valuation of the claim impossible, even though liability has attached. Of this latter class was the claim upon the bankrupt’s contract to pay his divorced wife a specified amount annually so long as she should remain unmarried, proof of which was for that reason rejected in Dunbar v. Dunbar, supra [190 U. S. 340, 23 S. Ct. 757, 47 L. Ed. 1084]; see Atkins v. Wilcox (C. C. A.) 105 F. 595, 53 L. R. A. 118.
“But the liability of an indorser is of neither class. Its amount is certain; and the contingency of notice of dishonor to the indorser is within the control of the creditor, so as to place his claim, so far as its certainty of accrual and its susceptibility of liquidation are concerned, upon the same footing as the contract of indemnity which was held provable in Williams v. U. S. Fidelity Co., supra [236 U. S. 549, 35 S. Ct. 289; 59 L. Ed. 713], although the claimant had done nothing at the time of the bankruptcy to satisfy the liability for which the indemnity was given. See, also, Central Trust Co. v. Chicago Auditorium, supra, pages 593, 594 of 240 U. S., 36 S. Ct. 412 [60 L. Ed. 811, L. R. A. 1917B, 580].”
In a scholarly periodical article, “Rent Claims in Bankruptcy,” 33 Col. L. Rev. 313, it is urged that the liberal attitude evinced by the Supreme Court with respect to the allowance of contingent claims against bankrupt indorsers of unmatured commercial paper might well induce the lower federal courts to modify their rulings as to claims upon leases. But until so instructed by the court of final authority we are unwilling to press the decision of Maynard v. Elliott so far. The Auditorium opinion expressly excluded ajjpliealion of the anticipatory breach doctrine to covenants to pay rent for land (240 U. S. 581, 590, 36 S. Ct. 412, 60 L. Ed. 811, L. R. A. 1917B, 580), and the distinction was again noted in Wm. Filene’s Sons Co. v. Weed, 245 U. S. 597, 601, 38 S. Ct. 211, 62 L. Ed. 497. See, also, Wells v. Twenty-First Street Realty Co., 12 F.(2d) 237 (C. C. A. 6). We still regard claims for future rent for land as too contingent to be proved against the bankrupt lessee. See In re Metropolitan Chain Stores, Inc. (Malavazos v. Irving Trust Co.) 66 F.(2d) 482 (C. C. A.) and Manhattan Properties, Inc., v. Irving Trust Co. (C. C. A.) 66 F.(2d) 470, handed down herewith. It follows that a lease of real estate is not terminated by bankruptcy, and a bankrupt lessee may still he held for future rent, and, if he pays it, may still continue to occupy under a lease which his trustee has elected not to assume. The likelihood of this occurring when the lessee is a corporation may be remote, but, if the lessee were an individual and the leased premises his dwelling house, it might well happen. Suppose that such a lease contained a covenant similar to the one involved in the ease at bar, and that the bankrupt lessee continued to occupy his dwelling house and pay rent after his trustee had renounced. Could his landlord, although the lease liad not been terminated and the tenant was still in possession, claim from the bankrupt estate the cost of restoring the alterations which the tenant had promised to pay “at the termination of the lease” ? It seems to the writer of this opinion that the answer must be in the negative, and must be the same whether the tenant is an individual or a corporation, and whether the leased premises be a dwelling house or business property. So long as the lease remains outstanding, the liability to restore the former condition remains contingent; it may never accrue, and is incapable of present valuation; nor is the contingency within the control of the claimant, as is the *490giving of notice of dishonor to a bankrupt indorser. The duty of restoration is so conditioned upon the cessation of occupation under the lease that the covenant to restore and the covenant to pay rent are not separable. Cf. In re Marshall’s Garage, 63 F.(2d) 759 (C. C. A. 2). In my opinion, therefore, the District Court properly expunged the claims of the appellants, and the order should be affirmed.