Amicus Curiae Brief — Manhattan Properties, Inc. v. Irving Trust Co.

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CHARLES EL!3P E

Supreme Court a the United Res

OCTOBER TERM, 1933.

MANHATTAN PROPERTIES, INC.,

Petitioners,

against

IRVING TRUST COMPANY, as Trus-

tee in Bankruptcy of Oliver A. Olson ‘Co.

Inc.,

Respondent.

SAMUEL R. BROWN, ALMIRA B.

MILLARD, ALFRED MILLARD and

HUGH MILLARD,

Petitioners,

against -

IRVING TRUST COMPANY, as ‘Trus-

tee in Bankruptcy of United Cigar Stores

_ Company of America,,a New Jersey Cor-

' poration,

Respondent.

No. 505.

No. 506.

BRIEF OF GODFREY GOLDMARK AS AMICUS CUR-

IAE ON BEHALF OF TRUSTEE IN BANKRUPTCY

OF McCRORY STORES CORPORATION.

SUBJECT INDEX.

Landlords’ claims against McCrory Stores Corpora-

tion $43,000,000

The reasons for filing Brief as Amicus Curiae......

(a) Reasons for bankruptcy of Chain Stores. .

(b) Application of Northern Pacific Ry. v. Boyd

eeeeeveeeoeeaeneeeeoeee see eeeeaee0e0e9

The Present Rule and its General Acceptance......

(a) Second Circuit (New York)..............

(b) Fighth Circuit (Nebraska)...............

prevailing rule ....... icssecaseeesoedvee

The Question of Relief if any is needed, + for

(EE oGas Vieku Riae bc he aeeeeaniteabaes

Perhaps question -is for. States through priority

or lien statutes......... Seaneedpecucescue

Perhaps situation is petite to nonprovable

tort and compensation Se Rocckereuens

al viedewndekee

Tentative Draft of Legislation + apreaante-

tive Committee set forth...................

BRIEF OF ARGUMENT.

too ee ee rn

at the filing of the petition m bankruptcy........ .

Claims must be justly owing—Sec. 57A of

1898 Act

Reasons for the rule,—gach creditor gets a

right in rem at the filing of the petition. .

PAGE

www wrnn wv

ii.

POINT Il. The leases here involved contemplated the ©

possible bankruptcy of the Tenants and contain ex- °

press covenants fixing the Landlords’ rights and the

Tenants’ obligations in such event. There is, there-

fore, no basis for attempting to invoke the doctrine

‘ of anticipatory breach of contract on the theory of

-an- implied covenant against going into bankruptcy.

These express covenants measure the Landlords’

rights and do not create a provable claim..........

Bilateral Exeeutory Contracts contain im-

plied ‘erm against disablement of per-.”

formance by bankruptey—Chicago Audi-

torium Case, 240 U.S: 581.....:........

The doctrine inapplicable here beeatise

leases contain Express Covenants re-

specting-bankruptey and the’ rights and

obligations and method and time of en-

- ° foreement of the latter. ‘There can be no

rx implied covenant ....:...... ictie Picea

- These provisions controlling........... ~

_ Me@ready v. Lindenborn.................

' Special Master’s. opinion in accord........

Judge.Mack’s opinion in accord...........

Bankruptey of Tenant not an anticipatory

breach of the covenants to pay damages

upon bankruptey » of the Tenant as that

cevenent only hecame effective because of

the bankruptey .:........ eteeataweiees

Parties havé agreed ‘that actuality of the

future’and not present prophecy shall

I 5 oko kcedn br anes ab oceans:

Kothe Case distinguished............

Filene Case distinguished...... Nee ae

Perhaps. covenant giving rise to provablé

claim could be devised.................

Validity of the Covenants here considered

PAGE

bo to to bo

ir)

cp)

bo bo

aon

iii

—_—

Not contrary to public policy....-----

If they are—a provable claim does not

FOWL oo cc ccccrcrsecceveredcoseers

Summary of Point II......-.---- a sunene

* BOINT III. If the petitioners’ proof of their claims is not

barred by the covenants of the leases, nevertheless,

petitioners’ claims are so contingent in existence and

amount that they are not provable ........-----: :

The claim here is for damages not rent ....-

If petitioners not contractually barred their

claims are so contingent as to be not prov-

ghee .ccccece. i. pec cieucwser oneness’

In re Merrill & Baker controlling .....-

Congress did not intend. contingent claims

to. be provable. Express provisions for

the proof of contingent claims in the 1867

Act were omitted from the Act of 1898

and cannot be put back by construction .. .

Question ‘‘lurked in the record’’ but not

decided in Maynard v. Elliott ....---- a

Arfalysis of the provisions of 1867 and 1898

hie cccudssventueesesntatesteseeses®

Congress omitted from 1898 all provisions

as to contingent claims but re-enacted in

~ substance the other provisions as to what

claims were provable eeavees Soh kee a ae

Provisions of 1867 Act cannot be put back

by construction ...---+--++°: rer Peer r ‘

Pirie v. Chicago Title & Trust Co., 182 | -

U. 8. 438 ....0eeeee SPT ree Ciaskes

Davis v. Pringle, 268 U. S. 315~..-----

The British Acts of 1869 and 1883 were not

' followed by Congress ..-----+--- eeeerrre

Judge Lowell’s bill in 1882 contained spe-

cific provisions as to leases; Congress

knew of it in 1898 but. failed to incorpo-

rate such provisions ....---++++s+5+00"

34-36

eel ly Sint GE EEE

Shas ae See wc ot DA acon DN ke ang AMIE oe

dab ies

. POINT Vi.

Only question in what the Statuton provide

The decisions ontabliah. Ghat elainie whieh

will nod enforeenble only

Wpon the oceurronee of a contingeney nol

reasonably eortain to Heer Are Hol pray

able ees

Naty of ¢ ‘ont tnyeont ( ative ;

| Maynard ee. lethiott

‘ Willian ie. lidelity & ho,

Morrill e. Baker

Rigwin e. Maarwire

Dunbar oe. Dunbar

Conelustons to Point 1

Toeverannnae hie

POINT IV. The Petitioners’ Brief aska this Court to ig-

nore history, precedent and Statuten

Seeks general rule irrespoetive of Covennuts

Iyneres fret of reentry by landlords and

ofYeet thereof in absenee of the-covennuts

If covenants ignored, damages do not sur

Vive reentry SL a ie ee eee

Doctrine of

vable

Anticipatory breach inappli

Oe Cate 6 6-8 Oe 2 4 ee ee

POINT V. Section 74 added ir in 1933 ions not make the

claims provable .

Applies only to ans ecaiiitinas Nee

Is. not retroactive and could not be made so

Whole question for Congress if present stat-

‘ ute unjust... aa

VAciiC

‘iS

e oa

e of

| CITATIONS.

Clarice: aE ' PAGK

Honred of Coriminsionenn eo, Hurley, 169 Med. 920... 12, 92

ContralTrust Company o. Chiengo Auditorium As

preety

narertendbenne, AUN, CMD. cece eens . 43, 24, 29, 51

Chemical Bank oe Armatrong, 99 Bed 72000... 12, 52

1 qtark o Kirby, SOs N,V. SU ce eee -

Davin oe. Pringle OK UL NSP a ued, oo, 41

' Donbar ie. Dunbar, MOA BIOL. tence ey 4, Mh, 47

Averett oe. dudnon, 288 UN. is. er ae a 12

Mederal National Bank oe, Koepel, 255 Make. 17... 24

Hilene's Sonn Co. oe. Weed, 245 08. PPS ree 26, 27

Giarelinree 0. Uectler Cin, 24% UM, EE... eee: 4g

Crymesn o. Sanders, et “ee 2 eS See kee fA)

(Gidding, J. Mo. & Co. (Charles Tf. Mears, plaintiff,

ugninal J. M. Chicding, & Co. Ine, defendant,

eqquily ST VAD) 6... eee eee ees tivae cues 19, 23, 26, 52

(frommes vo. St. Paul Trust Co, 147 ML 684. 00.0066. + 5)

Guarantee Tithe & Trust Co. ». Tithe Guaranty &

Surety, 224 U.S. bod... eee ee See eee ce. oe

Hall o. Gould Wa NLY. VST. ee eee y 49

Hermitage Co. vo. Levine, 248 N.Y. 335... .0..0005- 19,4

Houghton, ex parte, 1 Lowell 594. ...... 6.666006 3, 39

Joannes Brothers Co. ». Lamborn, et al., 297 N.Y.

OT cdencesnns tacees S gate a susewaueess Rae Ay

Kelly v, Security Mutual Life Ins.(Co., 196 N. Y. 16 A)

‘Kothe v. R. C. Taylor Trust, 280 U.S, 224......--. 26, 27

Kottler ». New York Bargain House, Inc., 242 N. Y. |

io i webees eens ss ere ener ee ey 5)

Cases: i , | | PAGE

Lamson, ete. Co. v. Bowland, 114 Fed. GOP svc ccesvas 30

Lane v. Industrial Com’r of New Y ork, 54 Fed. (2d)

Me cueanewseeannwnwarkdbssehcdtsstviav rTeTy 5

Martin >. Orgain, 174 Ped. 772... . cc cccccceccccece 4

Maynard v. Elliott, 2883 U.S. 273... 4,9, 11,31, 41, 42, 43, 44, 45

McCall v. Deuehler, 174 Fed. 133......0....0...0... 30

McCready rv. Lindenborn, 172 N. - See 14, 23, 49, 50

Mears v. Gidding. ........... 0.0.00. e0 cee ;. 19, 23, 26, Se

Merrill & Baker, In re, 186 Fed. 312.............5 31, 44, 47

Michaels rv. Fishel, 169 N.Y. 381...... eiwavccarees 49

Miller_v. Schloss, 218 N. Y. 400.................... 14,.29

New Jersey v. Anderson, 203 U.S. 483..4......... ‘ 52

Nichols vr. Seranton Steel Co., 137 N. Y. 471......... 50

Northern Pacifie Ry. Co. v. Boyd, 228 U.S. 482.....

Operators Oil Co. v. Barbol, 65 Fed. (2d) 857 eceee » ee

Pettingill, In re, 187 Fed. 143..................... 51

Pirie v. Chicago Title & Trust Co., 182 U. S. 438.... 37,41

Price v. se 2 re Pree ene 41.

Riggin v. Magwire,.15 Wall. 549..... ~iieeekeneeun 44, 47

Roehm vr. Horst, 178 U. S.1........ error Es TPeTr 50

Roth & Appél, In re, 181 Fed. 667.................. 3

Schall v. Camors, 251 U. S. 239............... _ .:, 9,39

Sexton v. Dreyfus, 219 U. S. 339........ SPEDE eee ‘12, 52

Sutton v. Goodman, 194 Mass.’ 389. . . ae eenginceesees 49

Thompson-Houston Electric Co. v. Durant Land Im-

provement Co., 144 N. Y. 34............ rrr 49.

Watson v. Merrill, 136 Fed. 359..:................ oe 3°

Webster v. Fall, 266 U. S. 507.......,............- Si .

Weitzen, In re, 3 Fed. Supp. 698 (S. D.N. Y. ee ee , 28.

Cases : PAGE

Western Electric Co. v. Powers Accounting Machine.

Co., Equity 19-150............... ae eddy 27, 49, 53

Williams v. U.S. Fidelity & G. Co., 236 U. 8. 549 .. 10, 42

Wilson v. Penn. Trust Co., 114 Fed. 742 ........... 30

Wise Shoes, Ine., In re, 2 Fed. Supp. 521, aff’d with-

ont opinion 64 Fed. (2d) 1023 ................ 19, 27

Zavelo v. Reeves, 227 U. 8. 625 ..............008 .. 10,29

StTaTUTES, ETC. :

~ Bankruptey Act of 1898 with Amendments:

RUD ec cau deeds eacsedseretesae Pres)

Be. TEE) ev ccvecsess senna eukesesewaee 36

See. — eres ee 42

Esch sy ckeuseaseeroenas Coors Fae caea en 51

General Order XXI Oe ccarncs tear deeecass 36

Bankruptey Act of 1867 (Rection 19) As Set Out

in the Revised Statutes of 187’ |

R. 8. See. SOG7T ........ ere rer fe SO

, Eo. o.6 bose va dvestenaesisiiaweeeee

EE ao vhe heen eus heck evedseareres 33, 36

* ee Sac deer edsdansiscaeanieeee 33, 36

eS PP errerr iy Tere creer rey

Bankruptcy Act of 1841: ;

Ti an snbakceveveedcexsnentesseeneen 38, 41

Legislation Proposed in Congress But Never En-

acted:

H. R. 5884, 73rd Congress, Ist Session ...... 6

S. 1382, 47th Congress, 2d Session “......... 39, 40

. Report No. 65, House of Representatives, 56th a:

Congress, 2d NN ee TSN AEE 39°

Third Tentative Draft of Amendments to the

Bankruptcy Act by a Committee of the Fourth

General Bankruptcy Conference under the

Chairmanship of Paul H. King, Esq. ........ 6,7 -

Vili

PACK

Mnglish Bankruptey Aet of T8833 (46 and 47 Viet,

sh ree ne eaeaiv eck aes.s' 6

Mnglish Bankruptey Aet of T869 (82 and 38 Viet,

ee De Uk eck eeadeee a6

Douglas and lMrank, ‘landlord Claims in Rear

oganivation’’, 4h Vale 4. dhourginl 1008) (1983) <

2 Tiany on Landlord and Tonmat (L910), p. 16d A)

T'THTany on Landlord and Tenant (L910), yp. UTA 49

2 Williston om Contracts (1920), S890 o.oo... 49

8 Williston on Contracts (1920), SIMD8 ooo e000... MW)

8 Williston on Contrnets (M20), SI4G6 00. hi)

1 Williston on Sales (1924), SOE eee, hi)

Williston, Cases on Bankraptey (2nd id), note

ep A GE ene bo pee a 86

Restatement of the Law of Contraets, S884 00.0... Mi)

Restatement of the Law of Coutraets, S818 0000... HY |

SUPREME, COURT OF THE UNITED STATES,

OCTOBER TERM, 1933.

MaNnnatran Prorniertes, Ine., ‘

Pelitioners,

aqainsl

mn ‘ 7h . ; No, WW

lnving Trower Comerany, os Trustee. in

Bankrupley of Oliver A. Olson Co.

Ine.,

. Respondent,

Samuenn Re Brown, Aumina Bo. Mar

nan, Anenens Mintaro and Peas { ar

~ Mitaatn,

Pelitioners,

against No. 506

leving Trosr Company, asx Trustee in

Bankruptey of United Cigar Stores

Company of America, a New Jersey

Corporation,

Respondent.

BRIEF OF GODFREY GOLDMARK AS AMICUS CURIAE

ON BEHALF OF TRUSTEE IN BANKRUPTCY OF

, -McCRORY STORES CORPORATION.

Pursuant to leave granted, this brief is filed on behalf

of the Trustee in Bankruptcy of McCrory Stores Corpo-

ration, bankrupt.

McCrory Stores Corporation, which with its subsidi-

aries operated 242 stores throughout the country, was ad-

judicated a bankrupt in New York on January 14, 13

upon its voluntary petition. The value of the assets of that

estate is estimated at between $5,000,000 and $8,000,000

depending on the realizable value of equities in real estate,

While merchandise creditors, debenture holders. and mis-

cellaneous creditors have filed claims aggregating $9,000,-

000, landlords have filed claims aggregating f4. 3,000,000 for

future rent and damages.

It is evident, therefore; that the Trustee in Bankruptey

of MeCrory Stores ( orporation representing the ereditors

in that estate has a real interest in the outeome of. these

CUSES,

The Heasons for Filing Brief as Amicus Curiae.

This brief ix filed becatse the underlying questions have

recently become of paramount importance to property

owners, general creditors, bankrupts, and consequently to

the publie itself.

During the past two years large corporations operating

stores in numerous states throughout the country, and gen-

eralivy known as ‘chain stores’? have as a result of. the

‘ depression found their volume of business and profits: con-

stantly dwindling and have been unable to reduce their ex-

penses proportionately, largely because of the existence of

fixed obligations for high rentals on long term leases made

during normal or exceedingly prosperous times. Gradually

eash and quick assets have’ been consumed in paying such

rents until ‘equitable insolvency ’’—the inability to meet

obligations as they matured—has resulted, although in

some cases not insolvency in the bankruptey sense. The -

result has been that in fairness to merchandise ereditors,

debentureholders and other creditors whose claims had ma-

tured, these corporations were bound by voluntary petition

to surrender their property to the bankruptey court for -

administration. This procedure has in many quarters re-

sulted in the ery that the purpose of the bankruptey pro- -

ceeding was to avoid lease obligations, to defraud the

landlords and to enable stockholders of these corporations

‘ to become revested with the property after the termination

of the bankruptey proceeding. This contention, however,

has overlooked the doctrine of the Boyd case (Northern

Pacific Ry. Co. v. Boyd, 228 U.S, 482).° .

The foregoing is the background which has caused these

cases to excite a general interest. ae

/ The Present Rule and its General Acceptance. a

.. For many years since the enactment of the Bankruptey

Act of 1898, it has been the general view that under the.

ordinary form of leases exacted by landlords, claims for

future rent or wi damages for breach of lease obligations

are neither provable nor dischargeable in bankruptcy. For '

the second circuit, the question was deemed decided in 1910

in In.re Roth & Apnel, 181 Fed. 667, which but followed

a similar ruling under the Act of 1867 Ea parte Houghton,

1 Lowéll, 554. For the Kighth Circuit including Nebraska

it was decided in Watson v. Merrill, 436 Fed. 359 in 1905.

In a majority of the circuits the same rule ‘has obtained.

Relying upon the doctrine of these cases, credit has been

‘extended for untold millions upon the confident assumption

that if bankruptcy of the person obtaining credit ensued,

the speculative. claims of landlords for future rent or

damages growing out of long term leases would not share

.with the ordinary unsecured general creditor in the dis-

tribution. of the bankfupt’s assets. .

During all the intervening years, landlords have evi-

dently been content with this interpretation of the 1898

Act because no evidence is found of any effort either to

bring the question to this court for determination or to

amend the law until the recent agitation. The very leases

here considered were made with knowledge of the existence

of the acceptetl and prevailing rule of interpretation of the

*For general discussion of the applicability of that case to the situation

above described, see “Landlord Claims In Reorganization” by William O.

Douglas and Jerome Frank, 42 Yale Law Journal, 1003, 1933.

covenants here involved, The rule. has been considered a

fixed rule of bankruptcy upon which all business trans-

actions and the extension of credits have been predicated, ’

Under these circumstances, the injustice to the ordinary

general creditor of now permitting claims of landlords of

many millions of dollars to share pari passu in the dis. —

tribution of the bankrupt’s assets, need Ri he enlarged

upon. | |

In Maynard vy. Elliott, 283 U.S. 273, 277, in discussing

the question of the provability of claims against endorsers

under certain circumstances and the effect of the estab-

lishment of a rule contrary fo that deemed to be in foree,

this Court said: , |

“Only compelling language in .the statute itself

would warrant the rejection of a construction so long

and so generally accepted, especially where overturn-

ing the established practice would have such far’

reaching consequences as.in the present-instance.”’

That principle of construction is peculiarly applicable

here.

~The Question is for Congress.

. Perhaps after a careful study of the whole subjeet

Congress may for the future provide some fair measure

of participation for landlords despite the termination of

a lease by re-entry. (See for example suggestions of Com-

mittee set forth in footnote on p, 7.) Perhaps.on the

other hand Congress may deem thie questions a local one

to be determined by each State and that the landlord’s

right in bankruptcy should be limited to the Tight to a

priority or a lien for rent for a given period, as.is now

provided by the statutes of many States and protected by

Sections 67 and 64 of the Bankruptcy Act.* Perhaps on the

other hand, landlords should be in the same class as tort -

niiailtiaiaiaiiie Sain

* See for example Martin v. Orgain, 174 Fed. 772 (C. C. A. 5th) upholding

a lien for rent accruing after bankruptcy under a Texas statute:

claimants or claimants under the Workmen’s Compensa- -

tion Act whose claims are neither provable nor discharge-

able in bankruptcy.. i

Schall v. Camors, 251 U. 8. 239;

Lane v. Industrial Com’r of New York, 54 Fed.

(2d) 338.

In Schall v. Camors, supra, as the briefs show, it was

strenuously argued that tort claims should be provable

in bankruptcy; that it was the underlying purpose of the ~

Bankruptey Act to permit all creditors to share in the

bankrupt estate; that claims which are not provable are

not discharged; and that it was contrary to one of the

tinderlying purposes of the Bankruptey Act to deny the

right to prove such claims because as a result the bank-

rupt would not be discharged. |

Despite all this argument, this court held that it was

not the intention under the Act of 1898 to allow. ordinary

tort claims based on nonfeasance or malfeasance without

unjust enrichment to be proved and held if any remedy

were needed, it was a question for Congress. Although

fourteen years have elapsed since that decision, no amend-

ment has been passed or agitated looking forthe allowange

of tort claims in bankruptcy.

Broadly speaking, it is as unjust to tort claimants to

deprive them of their right to share in the assets of the

corporate bankrupt as it is claimed to be unjust to a land-

lord, and it is unjust to the individual bankrupt to keep

‘alive against him-claims in tort (not resulting in unjust

enrichment) as it is to keep alive lease obligations. |

Accordingly, whether and to what extent there _—

be a change in this situation is obviously a legislative and

not a judicial question. It is a question upon which differ-

ent minds may differ radically. For example, the attempt

to speculate-upon and presently determine future damages *

growing out of the breach of long term leases, and the in-

clusion of the amount of an expert’s guess of such dam-

C .

ages, as a provable claim to cut down the dividends of “

other creditors, may well result in the curtailing of credit

in the future unless long term leases are abolished. Whether

~~ the landlords themselves would désire such a result may.

well be doubted. ‘

Fixed legal rules; acquiesced in and relied upon in every

day commercial transactions for a long-period of time may

be changed by Congress i in the future after full consider-

ation, but injustice and hardship must result if these rules

are changed for the past by a reversal of the long acecepted

rule unless required by ‘compelling language ip the stat-

ute.’’ That there is none such but that on the comtrary

Congress did not intend to include such claims as provable

debts will be shown perearier.

- Pending Legislation.

| At the very last session of Congress, a bill'was intro-

duced H.R. 5884 (73rd Congress, 1st Session), which in-

cluded a provision for the amendment of Sectioy’63 of the

Bankruptcy Act so as to provide for the inclusjon of prov-

able debts of claims upon workmen’s compensation awards

and claims for damages upon leases.’ The bill did not pass.

At this very time there is also’ under consideration* the

third tentative drfft of amendments to the Bankruptcy Act

proposed by a representative committee under the lead of

Paul H. King, Esq., Chairman of the Committee on Bank-

ruptcy of the Michigan State Bar Association and Chair-

man of the Comniittee on Uniformity | of Practige of the Na-

tional Association-of Referees in Bankruptcy” That Coni-

mittee’s recommendations with respect to the provability

Sec. 4. (a) Section 63() of the Act of July 1, 1898, entitled ‘An ‘Act

to establish a uniform system of bankruptcy throughout the United States’ ap -

proved July 1, 1898, as amended, is amended to read as follows: * *

(6) founded upon an award of an industrial “accident commission, or

other Commission, body or officer, of any State or. Territory having power or

jurisdiction to make awards as workmen’ $s compensation in case of injury or

death for injury prior to adjudication; and (7) claims for damages réspect-

ing executory contracts including future rent whether the bankrupt be an —

individual or a-corporation, which came shall be liquidated under section

63(b) of this Act.” ;

of claims growing out of leases set forth below show that

the competent draftsmen are aware of the possible injustice

fo other creditors in permitting landlords to prove claims

for future rent as suggested in’ H. R. 5884 (73rd Congress)

quoted at page 6 supra, or for damages for breach of an

entire lease.”

‘The whole subject should be left to Congress for further

‘consideration. > ean

?The Committee includes Mr. James A. McLaughlin of the Harvard Law

School, Mr. Peter B. Olney, Jr., a New. York Referee, Mr. Harold Reming-

ton; author of Remington on Bankruptcy, and Mr. Edwin S. S. Sunderland of

the law firm of Davis, Polk, Wardwell, Gardiner & Reed.

The third tentative draft of amendments. of that Committee contains the

following addition to Section 70 of the Bankruptcy Act:

- “bh The adjudication in bankruptcy shall constitute an anticipatory

breach as of the date of the petition, without regard to the actionability of

anticipatory breaches under state law, of any contract non-assignable on the

part of the bankrupt or not adopted by a trustee within a reasonable time

after his qualification and within four months after the adjudication

whether a trustee has qualified or not. An unexpired lease of real or per-

sonal property is an executory. contract within the meaning of this para-

graph and ¢laims for loss of the unexpired portion thereof shall be

provable if either party become bankrupt. A discharge shall relieve a

bankrupt of all a leages or other executory contracts entered

into before the petitiorNexcept as otherwise provided in Section 17. The

. bankruptcy of a landlord, however, shall not work forfeiture of the

tenant’s estate and shali give the landlord’s trustee in bankruptcy no elec-

tion to terminate the estate. A general covenant’in a lease that it shall not

be assigned shall nat be construed to prevent such lease passing to the

trustee at his‘ election, but an express covenant that the bankruptcy of a

specified party thereto or of either party shall terminate the lease at the

election of the other party shall be valid.”

It also proposed the following amendment to Section 63(4) of the Act:

_“(4) founded@ upon an ‘open account, or upon a contract express or

implied, including claims for anticipatory breach, as provided in section

70(b): Provided, however, that a claim of a landlord for anticipatory

breach of an unexpired lease of real estate shall in no event be proved or

allowed in an amount exceeding the rent reserved by the lease for the year

next succeeding the bankruptcy ;” : ao

And it proposed the following as Section 63(b) of the Act: ;

“b Contingent claims and claims for anticipatory breach shall be barred

b discharge, unless submitted under oath for allowance as provided in

Sectton 57, and shall be deemed provable unless the court finds the con-

tingencies incapable of being fairly estimated, in which event such claims

shall not be deemed provable.” - , ; . :

And the following as Section 63(c): :

“c (b) Unliquidated contingent claims and claims for anticipatory

breach of contract (claims against the bankrupt) may (, pursuant to ap-

plication to the court,) be liquidated in such manner as (it) the court.

shall direct. (, and may thereafter be proved and allowed against his es-

tate.) The liquidation of a contingent claim, or a claim for anti¢ipato

breach of contract, may be postponed until it appears whether or not ‘suc

claim is to become capable of being fairly estimated without unduly de-

laying the administration of the estate.”

Words proposed to be deleted from the ‘present Act are enclosed in

parenthesis. . é'

WOT ARON GT om 5 we aa) Sal SOOT 7

~ ;

The Question Presented in these - |

Two Cases. |

-Because of the partulr. covenant tai ‘in the

particular leases here involved, these two cases do not

‘ | * present the broad question whether claims for future rent

are provable in bankruptcy.* They do not present the ques- |

. tion whether under some form of covenant not contained

in these cases provabl. claims for damages might be

presented. Obviously these cases present the sole question

whether the courts below erred in expunging the particular

: claims predicated upon the particular covenants in the |

leases between the claimants and the bankrupt which cove--

« nants expressly contemplated bankruptcy of the tenant and

provided for the rights and obligations flowing therefrom.

_ { BRIEF OF THE ARGUMENT.

The provability of claims must be determined as of the '

date of the filing of the petition in bankruptcy. On that day

each creditor with a provable claim gets an interest in rem

in the assets of the bankrupt.

-¢ ~~

HL.

The leases here involved contemplated the possible

bankruptcy of the tenants and contained express covenants

- of indemnification against loss, fixing thé landlords’ rights

~ and the method and time of enforcement of the tenants’

obligations in such event. There is therefore no basis for

attempting to invoke the doctrine of anticipatory breach

of contract on the theory of implied cover.ants against go-

ing into bankruptcy as was done in the Chicago Auditorium

case, 240 U.S. 581.° These express covenants measure the

'* See infra, page 30.

‘landlords’ rights and do not create a provable claim. The

decisions of the New York Court of Appeals and two un-

- reported and clearly reasoned decisions support’ these

views. Nor can thera, be an anticipatory breach of these

express covenants by bankruptcy because the cevenants

only became effective upon the tenants’ bankruptcy and

could not be breached by that very fact.¢

III. 4

- 6

Even if the foregoing contentions are not sustained

then nevertheless the claims under the covenants are. 80

. contingent that they are not provaple. Congress by omit-

ting the provisions for the proof of contingent claims con-:

tained in the 1867 Act intended. that such claims should /

not be provable and the omitted provisions cannot be put

back by constriction. ‘The decided cases, too, show that such

claims are contingent and not provable. Maynard v. Elliott,

283 U. S. 273, does not militate against but on: ane contrary

‘supports these views.

o IV. ‘

The petitioners’ brief, asks this — to disregard ~

history, precedent and vale -of statutory construction and

to make all claims for loss of future rent provable irrespec-

_ tive of covenants and irrespective of their reentry upon the

leased premises. Their argument leads to impossible re- -

sults. Obviously the whole question is for Congress. —

vz.

€

The amendments of 1933 do not make the claims prov-

able. The provisidns are not retroactive and could not be

made so.

fo -. POINT! - .,,.:*

Provable debts include only those pre at the fling

Of the petition in bankruptcy. .

- d

The foregoing rule is established by the ss. Say

In Wdliams v. U.S. Fidelity & G. Co. , 236 U. S. 549, 556, ,

e this Court said: ‘

‘Within the inteflament of the _ provable

debts include all liabilities of the bankrupt founded

on contract, express or implied, which at the time

_. of the bankruptey were fixed in anfount or suscep-

* ° tible ef liquidation. Dunbar v. Dunbar, 190 U. 8.™

_ 340, 350; Crawford v. Burke, 195 U. S. 176,. 187;

Grant Shoe Co. Laird, 212 U.S. 445, 448; Zavelo v.

Reeves, 227 U.S. -, 631.”

In Zavelo v. Reeves, a U.. s. 625, the hidialials be-

tween the filing of the petition arid his discharge agreed

to pay one of his provable debts: “The question was whether

the debt. was discharged. This court held that it was not,

. and in the course of its opinion, said at page 631:

«¢ ,

‘‘But, reading the whole of Section 63, and con-

_ . sidering it’ in connection with the spirit and purpose

‘of the act, we-deem it plain: that the debts founded

‘upon open account or upon contract, express or im-

plied, that are provable under Section 63a 4 include

only such_as-existed at the time of the filing* of the

petition in bankruptcy. This court in effect adopted

that construction when, in promulgating the General

Qrders and Forms in Bankruptcy, 1898, under the

authority conferred by Section 30, a form of dis-

, charge was prescribed (Forms in Bankruptcy, No. —

.. 59) by which it is ordered that the bankrupt ‘be,

discharged from all debts andclaims which are made

provable by said acts against his estate, and which.

existed on the day of ____.— A.D.

‘on which day the petition for adjudication was filed

| him; excepting such debts as are by law excepted |

*Italics supplied throughout.

from. the operation of a discharge in bankruptcy’. .

And the forms prescribed for proof of debts all de-

clare that the indebtedness existed ‘at, and before the

filing of the said petition’. Forms 81 to 36 inclusive:

The General Orders and Forms,¢tc., are to be found.

in 172 U. S. Appendix; 89 Fed. Rep., Preface; 32

C. C. A. Preface; 3-Foster’s Fed. Pract. (4th ed.)

9526, 2559;°2572.”" eo

And in Maynard v. Elliott, 283 U.S. 273, 275, this Court

said: .

‘‘ Although the omission of any reference to con-

tingent claims in Section 63 of the present Act has

. -led to some confusion and uncertainty in. the de-

cisions, it is now settled that claims founded upon

contract, which at the time of the bankruptcy are

fixed in amount or susceptible of liquidation, may

be proved under subdivision (a) (4) of that section;

_ althou&h not absolutely owing when the petition is

filed.’’ : : .

—_—

The statement in the-latter case that fhe claim ‘need

not be ‘‘absolutely owing’, when the petition is filed per-

haps overlooks the requirement of Section 57(a) of the

Act, which provides as follows:

; v

‘‘Proof of claims shall consist-ef a statement

under oath, in. writing, signed by a creditor setting

forth. the claim, the consideration therefor, and

whether any, and, if so what, securities are held

therefor, and whether any, and, if so what, payments |

have been made:thereon, and that the sum claimed

is justly.ow1ne from the bankrupt to the creditor.’’ .

One of the reasons for the rule that the date of the |

filing of the petition is the date upon which provability

of. claims must ‘be determined, is that upon the filing of

the bankruptcy petition (followed of course by adjudica-

tion) each creditor with a provable claim gets a right in

rem in the assets of the bankrupt which is_in the nature

of a lien upon such part of the property of the bankrupt~

12.

”

—-

- as the amount of the ovediter's s provable claim bears at—

that time to the entire amount of the provable claims. This :

is a vested right i in property.

Board of Commissioners y..Hurley, 169 Fed. 92;

» Chemical Bank v. Armstrong, 59 Fed. 372 2, 378;

i, Sexton v. Dreyfus, 219 U.S. 339, 345.

_ Again the whole scheme of the Bankruptey Act‘is that *

the date of the filing of the petition is the date for deter-

mining the substantive rights of the parties. -Thus where

a bankrupt dies after the filing of a petition and even before

adjudication, the Trustee gets only the surrender value of

life insurance policies and the remainder of the proceeds

of the policy goes to the beneficiary.

Everett v. Judson, 298 U. S. 474.

And where a creditor has a die against a principal and

surety ang both are in bankruptey, the creditor’s rights

against the two est tes are fixed as of the time of the filing |

of the petition.

- Board of Commissioners v. Hurley, Supra,

~ So,. too; as to the vesting of title in the’ Trustee under

~ Section 70 ‘of the Bankruptey Actas construed in 1 the Jue

som case. _ +

_In the light of this pane it wall be shown that at the

time of the filing of the petition in bankruptcy neither

claimant kere had:a provable eee in. bankruptcy.

POINT II.) | e

‘The leases here involved oitiesiateted the possible |

bankruptcy of the tenants and contained express cove-

‘nants fixing the landlords’ rights and the tenant’s obli-

gations in such event. There is, therefore, no basis for

attempting to invoke the doctrine of anticipatory

+ breach of contract-on the theory of an implied cove-

nant against going into bankryptcy.. These express.

covenants measure the landlord’s rights and do not cre-

ate a provable claim. 7

, ‘

In the leading case of Cenfral Trust ‘Co. v. Chicago

Auditorium Association, 240 U. S. 581, this Court held that -

. the bankruptcy of the transfer company constituted an

anticipatory breach of its contract to furnish service to the

Auditorium .flotel because the bankruptcy stripped the

‘transfer company of its assets which were needed in the

performance of the contract and therefore disabled it from -

performing its obligation. The very basis of the court’s

~ decision was found in the following sentence:

‘In short, it’must be deemed an. implied term of

eyery contract that the promisor will’not permit him-

self, through insolvency or acts of bankruptcy, to be

disabled from making’ performance;. and, in this

view, bankruptcy proceedings are but the natural

- and legal consequence of something done or omitted”

to be done by the bankrupt, in violation ‘of his

engagement.’’ 240 U. S. at 591.

In the present cases, the situation is wholly different.’

Unlike the Auditorium case the parties here did not im-.

- pliedly undertake with respect to bankruptcy and leave it:

to the law to determine their rights. On the contrary

ee contemplated ‘the possibility of bankruptcy of

the tenant and expressly provided the rights and obligations

which should flow therefrom. The leases, presumably con-

taining clauses exacted. by the landlords, provided that the

‘ " - ‘ ~

P ° ”

be a tyne eee / - - 7 ¢ , Be eg PP ELLE DIIGO LE

MOS ies et : f “ ¥ : ' .

[ADELE PRB

bankruptcy a the tenant shofld be an act of default, and

provaded that* thereupon the Jandlord’ at his option might .

re-enter the premises ; and provided that in the event’ of |

such re-entry in the one case (#595, Record, p. 12) ‘that

. the tenant would pay at the end of each*month the differ-

ence between the reserved rental and the avails of reletting,

and in the other case (#506, Record, p. 28) that the tenant

would ‘‘indemnify’’ the lesset against all loss of rent which *

the landlord might incur by reason of the termination dur-

ing the residue of the term. The parties having thus ex-

‘pressly’ provided for thé rights and .the remedies flowing

rom the. tenant’s bankruptcy, there cannot be implied

either in law or in fact any other remedy or any measure

of damages "3 than that so’solemnly contracted for.

In Miller ¥. Schloss, 218.N. Y. 400, the New York Court

of Appeals said at page 406:

‘‘A contract cannot be implied in fact. where the -

facts are inconsistent with its existence; or against

' the declaration of the party to be charged ; or where.

there is an express contract covering the subject *

matter involved; or against the intention or under-

_ standing of the parties; or where an express.promise’

would be contrary to law.. The assent of the’person.

to be charged is necessary and unless he has con-

ducted himself in such manner that his assent may

_fairly'be inferred he has not contracted (Morse v.

Kenney, 87 Vt. 445; Mathie v. Hancock, 78 Vt. 414;

Hertzog v. Hertzog, 29 Pa. St. 465; Earle v. Coburn,

130 Mass: 596; Central Bridge Corporation v. ae. oe

batt, 4 Cush. 473): a

This general wabesbibi has — been applied to

the situation here presented by the New York Court of |

Appeals in McCready v. Lindenborn, 172 N. Y. 400.»

When read together the bill .of complaint ant the bill

__of particulars as pointed out by the Court of Appeals,

, set forth three causes of action—‘‘one for rent aecrued,

a second for breach of covenant to pay the deficiency,

and a third cause of action dha! a total breach of. the

: lease. ’” In that case, ‘as here, the’ lease provided that the

pay rent “gone that if he did so the hould become |

liable to pay him by way of dama; h@Aifference be-

tween the amount of rent reservéd and amounts of

rents which shall be: A receivefl or might with

due diligence be epllected and received from said demised.

premises during the-#esidue of said term remaining un-

expired at or immediately before the time of such re-entry

_*—in equal monthly payments as the amount of such differ-

ence shall from time to time be ascertained’. And in that °

case, As here, the landlord instead of. telying- upon the

‘remedy given him by the lease tried to rely on a common

law right to treat the lessee’s non-payment of rent and

‘repudiation of his rent covenant as a breach of the entire .’ '

lease so that he might retake possession .and sue at once

for damages for breach of the entire lease. Theré, as here,

the landlord preferred the common law, right, if there was

one, of suing at ene time for-damagé@# for breach of the

whole tease to the right given him by the lease which was

to sue from month to month as and if there was a differ-

’ ence between the amount of rent reserved and the amounts

collected from the premises on a re-letting.

: The trial court, however, ruled that plaintiff, i in being:

ing action for damages for breach of the entire lease was

premature and refused to permit plaintiff to introduce evi-

dence as to her damages. ~ Thereupon, plaintiff took excep-_

tions to the Appellate Division which reversed the tria

court and held that the plaintiff at common law could treat

the non-payment:of rent and the lessee’s repudiation as a

breach of the entire lease and could: re-enter and sue for

damages for such breach at once and that she did not have ..

.-to rely on the remediés given her by the covenants of the

_ lease. The Appellate Division said, 63 App. Div. 106, 111:

‘By the commencement of this action, however,

the plaintiff. alleged a total breach of the le e by the

defendant and sought to recover in this pare the

damages sustained by reason of the breach. The

: ae ree ec

action was not brought to enforce the covenant to

- pay rent. There can pe no doubt but that the plain-

tiff would have had the right: under the covenants

contained in-this lease to re-enter to lease the prop-

erty and to recover under the lease the difference

betaveen the rent reserved and the amount that she

was’able to realize from the property? She did not .

adoptthat course, but elected to treat the act of the

defendant as a total breach of the lease and to re- -

cover in one action the damages sustained by such

breach, and the question is whether or not such an

action can be maintained, The distinction between

an a¢tion to recover money due under an agreement

and an action to recover the damages sustained by a

breath of the agreement, is well recognized. The

legal effect of a breach of a contract of hiring for a

definite period and the right of a party to it after

such breach was exhaustively examined by the court

in. Howard v, Daly (61 N. Y. 362). In that case, it

was held that ‘A servant wrongfully discharged has

but two reme ses growing out of the wrongful aet:

(1) He may-treat the contract of hiring as continu-

ing, though broken by. the master, and may recover

damages for the breach. (2) He may rescind ‘the

contract; in which-case he could sue on a quantum

meruit, for services actually rendered. These reme-

dies are independent of and additional to his right to

sue for wages, for sums actually earned and due by

the terms of the. contract.’ The learned judge also

examined the rule to be applied in case of the de-

fendant’s repudiation of the contract at the time of

entering into the service, and he held, following the

eases of Hochster v. De La Tour (2 El. & Bl. 678)

and Frost v. Knight (L. R. (7 Exch.) 111 revg. S. C.

L. R. (5 Exch.) 322), that the opposite party has an

option either to treat the contract as subsisting, and

when the day arrives for commencing to serve to

offer to perform, or to regard it as immediately

broken, and to sue before the day arrives. This dis-

tinction between an action to recover damages for |

the breach of a contract which is in its character ©

executory, containing mutual covenants by the con-

tracting parties, and an action to enforce the cove- .

nants and agreement of such a contract is recognized =~

in all the cages, and is based upon the right of a.

- gs

4 . — .

A Ww

} ¢ ,

party to such«an agreement to elect whether he will

_ consider the contract as broken and. destroyed, and

= demand in oné action thé damages sustained, or, not-

withstanding the refusal of one party to carry out:

the contract, will bring an action to enforce its cove-

nants. I can see no reason why this principle should

not apply to a leasé as well as to any other contract

- which is in its nature es utory, or which contains

obligations to be performed in the future. Undoubt-

edly in this case the plaintiff could under the.cove-

nants in the lease have re-entered and recovered

rom the defendant the difference between the rent —

reserved and the amount realized from the property.

“But upon what principle was the plaintiff confined to

such a course? What wagthere to prevent her from

’ treating this refusal of the defendant to enter into

possession of the premises and comply with the con-

ditions of the lease as a total breach, and sue him for

the damages thereby sustained?’’

_ From this ruling, the defendant appealed and the Court of

Appeals rejected the entire argument of the Court bélow.

_The Court of Appeals ruled that at common law the

landlord could not treat non-payment of. rent and repudia-

tion as a breach of the entire lease, and consequently that

plaintiff could mot at once sue for damages for breach of

remedy was that provided by the le a2 namely, to sue for

the entire lease. The Court ruled ; at plaintiff’s only |

month to month as.a deficiency between the agreed rental

and the ammount collected from the premises appeared.

The Court of Appeals at pages 408, 409, said:

‘We do not sustain the theory upon which the

majority of the learned judges of the Appellate Di-:

vision proceeded to judgment, ‘to wit, that an action

will lie for the breach of the lease as an entirety and

the recovery of all .the amazes in a single —

brought before the exp! von of the term. the

breach of an.agreement to pay money in installments

‘s not a breach of the entire contract and will not

permit a rec-very of all the damages in advance

-18

(Wharton & Co. v. Winch, 140 N. Y. 287; Moore v.

Taylor, 42 Hun, 45.) So far as appears, the failire

to pay the rent was the only breach af which the de- ¢

w fendantwas guilty, far he was under no legal obliga-

tion to beeupy the demised premises, Kiven: if he

refused to recognize the lease as in foree, because,

as he claimed, the plaintiff failed to make the altera-

_ tions provided for, this} was not a violation of any

covenant that he had entered into. His breach con-

_ sisted simply of a failure to pay money in monthly

installments. In Wharton & Co... Winch (supra) -

it was held that where a contract Ki or -railroad con-

struction provides for payment in installments as the —

work progresses, a- failure ‘to: pay an installment

when ba is not such a breach of the entire contract

as to authorize the contractor to refuse to proceed

further and to recover the profits which he would

have earned had the contract been fully. performed.

So if a mortgagor refuses to pay the installments as

they fall due upon a mortgage given by him, and even

if he refuses to recognize the mortgage as in force

for some reason, the mortgagee cannot, in the .ab-

sence of a special provision. permitting it, call the

whole mortgage due upon the ground of an entire

breach. a

‘‘There scems to be a cistinction, whether well

grounded in principle or not, between a contract for

the payment of money in future installments and a

contract for the delivery of goods in future install-— -

ments (Nichols rv. Scranton Steel Company, 137 N. Y.

471), as well as a contract for future employment and

service. (Howard vr. Daly, 61 N. Y. 362.) We think

that the contract before us should be governed in

this respect by the principle laid down in Wharton a

- Co. v. Winch (supra). we

_And then the Court added the following most significant

statement:

‘* Aside from, this, however, when the parties by

their contract provide for the consequences-0f a

breach, lay down a rule to admeasure the damages

and agree when they are to be paid, the remedy thus

provided must be exclusively followed.’’

. =. seeeneeeiemmesmnaten Pas it: ahs J

Thus with respect to the effect of the covenant to pay

“damages at the end.of each month, the Court held that there

could be.no recovery until the damages had actually ac-

erued and then only, in the mode provided for in the cove-

nant itself. This case has been cited with approval in later

New York Cases. And the same principles have been held

applicable in a case. where a covenant provided for ‘*in-

demnity’’. rather than for the admeasurement of damages

atthe end of cach month. |

Hermitage Co. v. Levine, 248-N. Y. 333.

In re Wise Shoes, Inc., 2 Fed. Supp. 521, affirmed

without opinion 64 Fed. (2d) 1023.

So also in the instant case the claims cannot be proved —

and allowed because to do so would be contrary to the con-.

tracts between the parties which expressly provided for

- damages measured by the loss actually to be suffered in

the future as determined by a reletting. Obviously before —

any payment can be made to these claimants, their :con-

tract requires that this loss must be ascertained.

‘Thus in at least two equity receiverships in the lower

federal courts, claims similar to those of the creditors here,

were held not provable on the ground just stated.

In the Equity Receivership of J. M. Gidding & Co.

the Southern District of New York (Charles H. Mears,

plaintiff, against J. M. Gidding & Co. Ine. defendant,

Equity 27-141), the landlord filed a claim upon a lease con-

taining a covenant practically identical with that in No. 505.

The claim of the landlerd and the Receiver’s objections | |

thereto.were referred to the late Wallace Macfarlane of the

New. York Bar as Special Master. His report disallowing

the claim (to winch no exception was taken), although only

the report of a Special Master, is quoted in part below

because of his preeminence at the New York Bar and the

» clarity and force of his reasoning. The opinion in its en-

tirety is annexed hereto at page 58..

ate nace manana creas ieee: NT aL ee a

20 ©

In that case, a claim for $36,497. was filed for damages

representing the loss for the unexpired term. The Master

said: : 7

~ “This item of $36,497. represents the excess of

the total rent reserved for the unexpired term over

the alleged estimated value thereof, which is stated .

in the claim (Ex. 1, subd. 13) to be $13,000. per an-

num. It is expressly claimed, however, as damages

sustained by the lessor under the lessee’s covenant

to continue to be liable after the termination of the

lease for a sum equivalent to the amount of all the

rent ‘reserved in the lease less the avails of reletting,

such damages to be due and payable by the lessee on

the several rent days specified in the lease (claim,

ex. 1., subds. 11-13). |

‘“‘The receiver has objected to this item on ‘the

ground that the lessee’s covenant for continuing lia-_

bility after reentry of the landlord provides specifi-

cally not only that the measure of damages should

be the equivalent of the difference between the rent

reserved and the ayatls of reletting, but also that

such damages, so measured, ‘should be due and pay-

able by the lessee to the lessor'upon the several rent

days hereinbefore specified’, that is to say, on the

first days of June, September, December and March

in each year; that this provision was exclusive of any

other measure of damagés, and that the lessor was

not entitled to claim a present lump sum equal to the

excess of the total rent reserved for the unexpired

term over the present value-of such a lease for the

years it has stil to run determined by expert testi-

‘ fo. 7 > *

‘Tt seems to be apmitten in ‘the briefs filed with

the master on behalf of the.claimant that if her right

to damages must be determined by the language of

the lessee’s covenant for continuing liability, the

claim now made by her under that covenant will not

\ be provable; byt it is argued that the receivership

and the insolvency of the lessee constitute an antici-

patory breach of this covenant, relieving’ the:lesgor |

from its provisions in respect to payment of dam- .

ages and entitling her to prove her whole damages as

of the present time in a lump sum on the basis of

" a comparison between the present value of. the unex-

21.

y pired term and the rent reserved for the seventeen

years that the lease has still torun. * * *°

: “The lessee’s alleged ‘anftcipatory. breach’ of

the covenants of the lease to pay rent and taxes and

perform other obligations as tenani, was a conse-

quence of its insolvency and the recei ership. The

lessee thereby became unable, and the receiver re-

fused, to perform any longer the covenants of the

lease imposing obligations upon the lessee as ten-

ant. This breach led to the termination of the lease _

and the annulment of the relation of landlord and

tenant. The termination of the lease and the re-

entry by thé landlord through summary proceed-

ings brought into active operation the agreement

continuing the personal liability of the lessee, which,

though contained in Hie lease, was wholly uncon- —

nected with the use of the land. This special agree-

ment provides with completeness and precision just

what the continuing liability of the former tenant for .

damages should be, how the damages should be as-

certained and even when they should become due and

payable. Without this special agreement, the ten-

ant, after the reentry of the landlord by summary

proceedings would have been under no further lta-

bility at all arising out of the lease proper. (C. P. A.

1434, Hall v. Gould, 13 N. Y. 127; Michaels v. Fishel,

169 N. Y. 381, 387; Gardiner v. Butler, 245-U. 8. 603. —

“To say that the anticipatory breach arising

from the receivership, as a consequence of which the.

landlord reentered and annulled the lease, was also -

a breach of the special agreement of the parties pro-

viding what their respective rights and liabilities

should be upon such a reentry for such a breach, is

an untenable argument. The anticipatory breach in

this case affected thé special agreement for continu-

ing liability only by giving,it vitality and operative

eo. ua

‘“‘4s already shown, the alleged anticipatory

breach resulting from. the insolvency of Gidding &

Co. and the appointment of a recewer, was not a

breach of the covenant for continuing liability but

operated, through the consequent annulment of the

lease, to make that covenant effective. * * *—

‘‘Other authorities cited in the briefs, while de-

* «> ciding questions analogous to that presented by this

“

Ba Rene name ns — : ; : eR LEAL ALLO EAS ALLO OR

BS Caras fe é ‘ “ “ wowy Sates! «5 i ’ ee

“*

’

claim, are clearly distinguishable. Those that in-

volve the construction of a lessee’s covenants for

continuing liability after reentry of the landlord and — .

termination of the lease necessarily turn upon the

form of the covenant, and it will be found that ap-

‘parent differences in the decisions are. satisfactorily

explained arid reconciled by comparison of the cove-

nants involved. In Filene’s Sons Co. v. Weed, 245

U. S. 598 and in the first claim allowed in Gardiner

v. Butler € Co., 245 U. S. 603, the lessee agreed, in

the event of reentity and the termination of the lease,

to pay the difference between the rental value and

the rent and other payments named in the lease for ©

the residue of the term. These covenants were, as

the court held, agreements between the parties that:

the evicted lessee should be liable for a present: pay-

ment computed according to the familiar rule of

datyages accruing to a lessor far loss of the profits

of the unexpired term. In such eases,.the contract

provides for a present claim determingd precisely in

accordance with an agreed rule. On the other hand,

where the case presents a covenant which provides

that the tenant shall remain liable during the unéx-

pired term for’ the amount, or the ‘equivalent’ of

the amount, of all the rent reserved less the avails

of reletting, without any provision for periodic set-

tlements, the decisions hold with substantial uni-

_formity, that the lessor has no right of action until

the completion of the unexpired term, because until

that time comes itis impossible to determine what

the damages will be, or whether there will .be any

damages at all’ ( Seidlitz v. Auerbach, 186 App... .

Div. 7, 13 rev. 230 N. Y. 167; Matter of Hevenor, 144

N. Y: 271; Harding ‘v. Austin, 93 App. Div. ‘564

Substantially similar are the bankruptcy oo

upon covenants which take the form of an agree-

ment by the tenant to indemnify the lessor ‘during

' the residue of the term for loss of rent and other

payments incurred by the termination of the lease.

(In're Ells, 98 Fed. 967; In re Shaffer, 124 Fed.

111). ene

“This item of damages, therefore, in the claim

presented to the receiver should be disallowed, not

because, it is contingent and uncertain, but because

it-is contrary to the contract between the parties,

s..

which expressly provides for damages nae by

the difference between the rent reserved and the rent —

actually recewed from time to time on reletting, to

be ascertained and paid quarterly.. Obviously, be-

fore it can be paid, it must be ascertained. Un-

doubtedly, any claim in conformity with the contract

covering any period except the quarter falling due

March 1, 1924, would ‘have ‘eel ‘uncertain, dnd in-

deed impossible of estimation, and therefore wholly

contingent, because the rents that would be received

in future period could not be known and the avails

of reletting might in many quarters exceed the rent

reserved. 7

—

The:.same. conclusion was — a Circuit Judge

Julian W. Mack, while sitting in the District Court in

« New York, in an unreported opinion in Western Electric

Co. v. Powers Accounting Machine Co. Equity 19-150 copy

pf which opinion is annexed hereto at page 53. There Judge

Mack in refusing to hold provable in equity a claim aumilar

to that in No. 506, said:

‘*Nor can the Court adopt some other readily as-

certainable measure of.damages such as the one that

would have prevailed but for express specification

of the method of determining the damages. The

Court cannot alter the contractual provisions; the

parties have not agreed that the lessee shall be liable

for damages and then merely suggested a method of

fixing them; they have provided that on such termi-.

nation, when but for the provision no damages

could be claimed, the lessee ‘shall be liable for any.

loss or deficiency of rent which may be suffered.’

‘«Not only is there therefore no basis for the claim

as filed for the full reserved rent, but even if it were

amended so as to charge an actual termination of the

lease and in respect to damages therefor to assert, -

contrary to the contractual provisions a right to the. 7

_ difference between the rents reserved and the actual

rental value at the time of termination, it would

have to be disallowed.’’

From the principle affirmed in the Gidding, Western

Electric Co. and McCready cased it follows that the peti-

tioners here had no presently due and enforceable claim

a “

which would have entitled them to bring an action in law

or to prove in equity. Their claims were .likewise there-

. fore not provable in bankruptcy because as stated by Judge

Lowell in Jn Re Pettingill, 137 Fed. 143, 147, and quoted

with approval by this Court in the Chicago Auditorium |

case, supra, at page 992: |

{ «<The test of provability under the Act of 1898

Ynay be stated thus: If the bankrupt, at the time of

-. bankruptcy, by disenabling himself from performing

the contract in question, and by repudiating its obji-

gation, could give the proving creditor the right to

maintain at once a suit in which damages could be

assessed at law or in equity, then the creditor can

prove in bankruptcy on the ground that bankruptcy

is the equivalent to disenablement and repudiation.

For the assessment of damagés proceedings may be

directed by the court under Section 63b (30 Stat.

562).’ ”’ 2

‘ ~, *,¢ .

Under ‘this test the petitioners have no claim provable

in bankruptcy. :

In the light of the deregeing authorities, it is evident

that in face of the éxpress covenants contemplating bank-

ruptcy there is no implied covenant ‘fixing the rights upori

bankruptcy. It is also evident that the landlord may not

ignore the express provisions of the leases and assert.that

bankruptcy gives rise to the anticipatory breach of an %im-

plied covenant”’ and a present claim for damages. .

The bankruptcy of a Tenant does not constitute an

a Breach of the Covenant to pay damages

upon the bankruptcy of the Tenant inasmuch as that cove- -

nant only became effective because of the bankruptcy.

Both leases provide just how and when the damages

contemplated by the parties. following bankruptcy and re-

entry shall be measured and determined. The parties have

deliberately contracted that the actuality of the future and

not the present estimate of future damages shall determine

] :

EEE Ppa RF

the amount of the damage. They both provide that the obli-

gation to pay shall depend upon the actual future event.

Neither provides, as it could have done, for a present claim

either at the time of bankruptcy or at the time of reentry.

The covenant to pay which survives reentry does not be-

come operative until-the bankruptcy and the reentry.

It is true, as already stated, that this:court has held that

the bankruptcy of a promisor of an executory bilateral con-

tract constitutes an anticipatory, breach ‘of the promise be-

cause such insolvency and bankruptcy constitutes a breach

of the implied undertaking. in every promise that. the

‘promisor ‘will not permit himself, through insolvency or

bankruptcy or the like, from making performance. But

how can such an undertaking possibly be implied in the

covenant to indemnify against loss of rents when that very

covenant was to come into effect upon thie promisor’s be-

ing disabled by bankruptcy? The parties in expressly pro- ~

viding that bankruptcy should bring into existence of the

covenant of indemnification against loss, cannot be. assumed

to have impliedly provided that that self-same insolvency

and bankruptcy. should constitute a. breach of the very

covenant ‘whickNt brought into existence. .

It cannot, therefore, be seriously argued that the bank-

ruptcy itself constituted an.anticipatory breach.of the very

covenant to pay damages when that covenant to pay only -

became effective upon the very bankruptcy which is alleged.

to causé the anticipatory breach. |

See | . oy,

Mears. v. J. M. Gidding & Co., supra, at page 21..

Western Electric Co. v. Power Accounting Ma-

chine Co., supra, at page %.2a3 -

Forms of Covenants Not

Here Involved. ;

Leases of real property of course differ materially in

their provésions with respect to the rights of landlords

upon various ‘‘acts of default’’ by the tenant and it will

be helpful, therefore, clearly to distinguish various other —

a en So MeN ae DBO YW ROSE OX {wee PE PR ELE ES EI

- =

' 96

classes of covenants which have been the subject of con-

sideration by the’ courts, but which are wholly different

from the covenants here involved. The provability of .

claims under such other covenants. is not presented...

- Class A. A lease may provide that in the event of non-

payment of rent or in the event of the bankruptcy of the

tenant, the lease shall ipso facto terminate and ‘that the ,’

landlord may reenter and that the tenant shall immediately.

be liable for all the rent for the balance of the term. A.

claim. under such a provision was held Sy this Court not

provable in bankruptcy in Kothe v. R. C. Taylor Trust,

280 U.S. 224, upon the ground that the provision was for

-an unenforceable penalty and that the parties were under-

taking to contract for a payment to be made out of the

assets of a bankrupt estate, which payment would affect

only those entitled to share in the proceeds of the property.

Class B. The lease may provide that in the event of

non-payment of rent or in the event ‘of the bankruptcy of

the tenant, the landlord at his election may thereafter re-

‘enter and despite reentry and termination of the lease,

the tenant shall then pay the difference between the re-

served rental discounted and the market value of the lease..

Such a claim was held provable in an equity receivership

in Filene’s Sons Co. v. Weed, 245 U. S. 597. It is to be

noted that the covenant fixes a present measure of damages

to be based on a prophesy of the future. Whether the claim

would be provable in bankruptcy is not presented here.

Class C. ‘Thé lease may provide that in the event of non-

payment of rent or in the event of the bankruptcy of the

tenant, the landlord may at his election thereafter re-enter,

- and despite such reentry and termination of the lease, the

tenant shall pay at the end of each month the difference

between the reserved rental for that month and the actual

_avails of reletting for that month. Such a claim was held

not provable in the equity receivership of. 4. ‘M. Gidding &

Co. Inc., supra.

‘2

- ; v

Class D.. The lease may provide that-in the event of

non-payment of rent or in the eveit of the bankruptcy of

the tenant, the landldrd may at his, election thereafter re-

enter. and despite sucltreentry and termination of the lease,

_the tenant agrees to indemnify. the landlord for any loss

sustained over the residue of the term. sSuch a claim was

held not provable in an efuity receivership, (see the opinion

of Judge Mack hereto annexed at page 53) and in bank- °

ruptcy in the well reasoned opinion of District Judge Pat-

terson in the Wise Shoe case, supra, at page 19.

- Obviously the cases now before this court fall within

Classes ‘‘C’’ and ‘‘D”’, and*for the reasons above indicated,

these particular’ leases give rise to no provable ¢laim in

bankruptcy because the parties have deliberately contem- ° ?

_ plated bankruptcy and have provided what the remedy in

the event bankruptcy shall be, and just how and when the

claims shall be admegsured. © _ we

Whether or not a covenant can be drawn within the

principles of Kothe and. Filene cases which would give

rise to a provable claim in bankruptcy is not presented by .

the record in these cases. Perhaps a covenant to the effect

-that upon bankruptcy a lease shall ipso -facto terminate

and the tenant. shall be liable for the: difference between

the reserved rent discounted and the market value of the

lease, would he a provable claim. That question is not

here. Furthermore, it is not believed that -the landlords

would in general exact such a covenant for they dé not de-

sire that leases should terminate ipso facto pon bank-

ruptcy. . They prefer to reserve an election and to deter- ;

mine their course #fter bankruptcy; and they prefer after

" such election to have the tenant’s covenant despite its bank-

ruptey to’ pay at the end of each month or at the end of the

‘ term the actual damages sustained rather than to have*a

present claim based upon present speculation as to future

damages. In the event of composition or reorganization

their position under such a covenant would’ be extremely

desirable. In‘éther words, they liave preferred that the

}

og |

liability of the tenant shall continue after b nkruptey, sub-

_ ject to their option to terminate the ese ater Zhan to

gamble upon the receipt in many cases of a small dividend

and the diSthargeability of the obligation. They should

be held to their bargain. Having deliberately exacted and

accepted such a covenant, they-cannot, as is so forceably

pointed out in the opinions above referred to, now because

of present conditions, seek by ingenious argument to avoid

the véry results of their own exactions.

Validity of the Covenants for Damages.

The question must .not be overlooked, however, as to

_ whether the instant covenants are valid, and if invalid the

effect thereof. aa ?

The question is whether these covenants are contrary

to public policy in that they attempt to keep alive obliga-

‘ tions which would otherwise be discharged upon the re-

entry of the premises by the-landlord, or putting it another

way, whether they provide an unlawful penalty for going.

into bankruptcy.

Discharge in bankruptcy releases a bankrupt from hie

provable. debts (Bankruptcy Act Section 17). There is:

- authority to the effect that it would be repugnant to the

purposes of the Bankruptcy Act to permit the cireumven-

tion of its object by the simple device of a clause in the

agreement out of which a. provable debt springs stipulat-

ing that a discharge in bankruptcy will not be pleaded.

Federal National Bank v. Koepel, 253 Mass. 157;

_ Inre Weitzen, 3 Fed. Supp. 698 (S. D. N. Y.).

It is believed that this salutary principle is inapplica- —

ble to the present: situdtion,.and even if applicable cannot

give rise to a provable claim, for the following reasons:

The existence and provability of cMdims is determined

as of the date of the filing of the petition. At that. time,

the tenant is in possession. The tenant if he sees fit may

remain in possession and pay unless. the landlord reenters

under the covenant. Accordingly, it is the reentry under

the covenant, after the filing of the petition which gives

rise for the first time to the obligation to pay damages.

This obligation did not exist at the time of the filing of the

petition, and acc rdingly was not a provable or discharge-

able claim. If the bankrupt sees fit despite “his discharge

from provable debts to assume such an obligation; he is not

- punning counter -to the policy underlying the bankruptcy

‘law. See Zavelo v. Reeves, supra, page 10.

Furthermore ‘even if the covenant to pay damages after

reentry to be measured and paid at the end of ‘each month

or at the termination of the lease is for any reason held

void, nevertheless the position of the petitioners is net im-

proved. The invalidity: of the express covenant could not

in any event result in an implied covenant not to-go into

bankruptcy so as to give rise to a provable claim. See |

Miller v. Schloss, 218 N. Y. 400, 406, supra. © .

; fas

Conclusion of Point TI.

It is submitted, therefore, that it has been shown that

petitioners had no provable claim upon the filing of the

bankruptcy petition for the following reasons:

(a) The express covenants of the parties preclude a

- consideration of the question whether under fhe doctrine

of the Chicago Auditorium case, there is an implied cove-

nant in a lease against going into bankruptcy which is

breached by the bankruptey and which gives rise to a pres-

ent claim. ? |

(b) The express covenants of the parties do not give ©

rise to a present provable claim because contractually the .

parties have agreed that there shall not be a present prov-

able claim. at the time of bankruptcy or reentry, but that

the actuality of the future and not the prophesy of the ©

present shall Yetermine what if anything shall be paid by |

the tenant. ’

tory breach of the covenants to pay damages which -become

‘effective only upon bankruptcy.

- | POINT Ill. — ‘

‘If the petitioners’ proof of their claims is not barred by

the covenants of the leases, nevertheless petitioners’ claims

are so contingent in existence and amount that they are not

provable. .

It must be emphasized that the claims here involved are |

not for future rent but, inasmuch as the landlords have

re-entered, for future damages.*

‘Hermitage Co. v. Levine, 248 N. Y. 333;

Kottler v. New York Bargain House, Inc., 242,

N. Y. 28; -

~ Grommes v. St. Paul Trust Co., 147 Ill. 634, 642.

There is no question here of prevebility of contingent

claims because the parties have expressly covenanted as.

to when and how the damages if any are to be ascertained

in the event of bankruptcy and re-entry by the. landlord.

The time for such ascertainment had not arrived at the

time of bankruptcy. If the Court new should permit proof

of this claim it would be attempting to measure the dam-

ages by a method contrary to that agreed to by the parties.

And this the Court should not do as pointed out supra in’

‘Point IL |

If -however the foregoing argument be pene unsound

then nevertheless the claims here sought to be prdved are

contingent. The only possible claims which the petitioners

had at the time of bankruptcy were those arising upon the

covenants which survived re-entry. But at that time these

claims were contingent both in existence and valuation. At

. the time of bankruptcy they were contingent in existence on

the occurrence of two events 1) re-entry by the landlord

2) the actwal (not the presently estimated) amount of rent

thereafter received for the’ leased property for the balance

of the term, which amount deducted from the reserved

rental would measure the actual future loss, if any. They

*If it were a claim for rent, qua rent, and were provable as such, the ~

balance of the term would belong to the trustee in bankruptcy. Wilson v. Penn.

Trust Co., 114 Fed. 742; Lamson etc. Co. v. Bowland, 114 Fed. 639; McCall

Co. v. Deuchler, -174 Fed. 133,

}

—— _——————————L

likewise were contingent as to valuation on the occurrence

of these same events.

In Re Merrill:¢& Baker, 186 Fed. 312 approved in May-

nard v. Elliott, discussed hereafter at page 44, the claim

‘was deemed contingent because it was wholly uncertain at

what price the collateral which was the primary fund out

of which the debt was to be paid, could be sold. In the

present case the claim was likewise contingent at the time

_ of bankruptcy because it was wholly uncertain whether the

lessor would. re-enter and if so, at what price the leased

premises would actually re-rent over a period of years.

It now will be shown: .

(A) Congress did not intend claims contingent in char-

acter to be’ provable under the Act of 1898; and

(B) Under the decisions of this Court, such claims so

_contingent are unprovable. .

Congress in enacting the Bankruptcy Act of 1898 did not in- |

tend to make contingent claims, such as here involved, provable

in bankruptcy. The express provisions for the proof of contin-

gent claims in the 1867 Act were omitted from the Act of 1898

and cannot be put back by construction. ~ '

- This question does not seem to. have been considered

in any case. It ‘‘lurked in the record’’, but was not argued

- or decided in Maynard v. Elliott, infra. In Webster v. Fall,

266 U. S. 507, 511, this Ceutt said: ©

‘‘Questions. which merely lurk in the record,

neither brought to the attention of the court nor

ruled upon, are not to be considered as having been

* so decided as to constitute precedents.’’

A careful consideration of the provisions of the Act of

1898 in connection with the provisions of the Act of 1867

must lead to the conclusion that only claims absolutely

owing at the time of the filing of the petition, although then

not payable, are provable under the 1898°Act. An analysis

of the sections of the two Acts with respect to what claims

are provable will reveal that the 1898 Act has taken over

all provisions from the 1867 Act with respect to what claims’

are provable, except the provisions of the 1867 Act provid-

ing for the proof of contingent claims. ,

The Act of 1867 is found in 14 Stat. 525, Chapter 176, .

and the provision as to what claims were provable is ©

found in Section 19 thereof. Thereafter this Act of 1867

was included in the Revised Statutes of 1873,‘ahd Section

19 of the Act of 1867 providing for provable claims ap-

pears as Sections 5067 et seq. of the Revised Statutes.

The applicable provisions of the Revised Statutes read as

follows:

“See. 5067: All debts due and payable from the

bankrupt at the time of the commencement of pro-

ceedings in bankruptcy and all debts then existing

but not payable till a future day, a rebate of intgyest

being made when no interest is payable by the terms

of the contract, may be proved against the estate of

the bankrupt. ’All demands against the bankrupt for.

or on account of any goods or chattels wrongfully.

- taken, converted of withheld by him may be proved

and allowed as debts to the amount of the value of

the property.so taken or withheld, with interest.

When the bankrupt is liable for unliquidated dam-

ages arising out of any contract or promise, or on

account of any goods or chaftels wrongfully taken,

converted or withheld, the court may ‘cause such

damages to be assessed in such mode as it may deem

best, and the-sum so assessed may be proved against

the “estate. doit

‘Sec, 5068: In all cases of contingent debts and

contingent liabilities contracted by the bankrupt, and |

not herein otherwise provided for, the creditor may

make claim therefor, and have his claim allowed,

with the right to share in dividends, if the contin-

- gency happens before the order for’ final dividend ;

or he may, at any time, apply ta the court to have

the present value of the debt or liability ascertained

and liquidated, which shall then be done in such man-

*Originally in Sec. 19 of the Act of 1867 before being iia the three

sentences of Sec. 5067 each appeared as a separate paragraph. The first two

sentences constituted paragraphs one and two of Sec. 19 and the third sentence

appeared as the eighth paragraph of Sec. 19. When the revision was made

at the direction of Congress, the revisers apparently thought that the sense

of these three sentences required that they be placed together.

Sie

* ner as the court shalk order, and he shall be allowed

to prove for. the amount so ascertained.’”’ ‘

‘*Sec. 5069: hen the bankrupt is’ bound as

drawer, endorser, surety, bail or guarantor upon any. —

bill, bond, note or any other specialty or contract or

for any debt of another person, but his liability does

net become absolute until after the adjudication in

bankruptcy, the creditor may prove the same after

such liability becomes fixed, and before final dividend

is declared.”’

‘‘See, 5070: Any person liable as bail, surety,

guarantor, or otherwise for the bankrupt, who shalt

have paid the debt, or any part thereof, discharge ~

-of.the whole shall be entitled to prove such debt

or to stand in the place of the creditorgf the creditor

has proved the same, although such payments shall

have been made after the proceedings ‘in bankruptcy

. were commenced. And any person so liable for the

bankrupt, and who has not paid the whele of such

debt, but is still liable for the same or any part

thereof, may, if the creditor fails or omits to prove

such debt, prove the same either in the name of the -

creditor or otherwise, as may be. provided by the

general orders, and eager: | to such regulations and

‘limitations as may be established by such. general

\ - orders.”’ a

( \ |. #*See. 5071: Where the bankrupt is liable to pay

\ rent or other debt falling due at fixed and stated.

“periods, the creditor may prove for a proportionate

part thereof up to the time of. the bankruptcy, as if:

the same grew due from day to day, and not:at such

- fixed and stated periods.’’

Sec. 63 of the Act of 1898 reads as follows:

‘6a. Debts of the. bankrupt may be proved and

allowed against his estate which are (I) a fixed

liability, as evidenced by a judgment or an instru-

ment in writing, absolutely owing at the time of the

filing of the petition against him, whether then pay-

able or not, with any interest thereon which would

have been recoverable at that date or with a rebate

of interest upon such as were not. then payable and

‘did not bear interest; (2) due as costs taxable.

against an involuntary bankrupt who was at the time

of the filing of the petition against him plaintiff in a .

cause of action which would pass to the trustee and

don naeneth | tat an il

which the.trustee declines to prosecute after notice;

(3) founded upon a claim for taxable costs incurred

' in good faith by a creditor before the filing of the

petition in an action to recover a provable debt; (4)

founded upon an open account, or upon a contract ex-

press or implied; and (5) founded upon provable

debts reduced to judgments after the filing of the

petition and before the consideration of the bank-

- and interests accrued after the filing of the petition

and up to the time of the'entry of such judgments.

‘‘b. Unliquidated claims against the bankrupt

‘may, pursuant to application to the court, be liqui- -

dated in such manner as it shall direct, and may

‘thereafter be proved and allowed against his estate.”’

Comparison of these two Sections makes it clear that

Section 63(a) (1) and (4) and Section 63(b) are. substan-—

tially the ‘same as the provisions of Revised Statutes,

Section 5067. This is made clear when the said Sections

“rupt’s application for a discharge, less cost incurréd™” “

are put in parallel columns as follows: ,

Act or 1867.

Revised Statutes, Sec. 5067,

14 Stat. at Large 525, c. 176,

Sec. 19.

‘¢All debts dué and pay-

ablef from the bankrupt at

‘the time of the commence-

ment of proceedings in bank-

ruptcy, and all debts then ex-

_isting but not payable till a

future day, a rebate of in-

’ terest being made when no

interest is payable by the

terms of the contract, may be.

proved against the estate of

the bankrupt. All demands

’ against the bankrupt for or

on account of any goods or

chattels wrongfully taken,

converted,or withheld by him

may be proved and allowed

as debts to the amount of the

valueof the property sotaken

Act or 1898.

30 Stat. at Large 562,

See. 63.

‘fa Debts of the bankrupt

may be proved and allowed

against his estate which are

(1) a fixed liability, as evi-

denced by judgment or an

instrument in writing, abso-

lutely owing at the time of

the. filing of the petition

against him, whether then

payable or not, with any in-

terest thereon which would

have been recoverable at

that date or with a rebate in

interest upon such as were

not then payable and did not

bear interest; * * *; (4)

founded upon an open ac-

count or upon a contract ex-

pressed or implied; * * *.

or withheld, with interest.

When the bankrupt is liable

for unliquidated damages

arising out of any contract

or promise, or on account of

- any goods or chattels wrong-

fully taken, converted, or

withheld, the court . may

~~ camse- such damages to’ be

assessed in such mode as it

(b) Unliquidated claims

against the bankrupt may,

pursuant to application to

the court be liquidated in

such manner as it shall. -

direct, and may thereafter

be proved and allowed’

against his estate.”’ |

. /

4 .

may deem best, and the sum

so assessed may be proved.

against the estate.’

. Section 63(b), of course, does not enlarge.the class of

claims provable under Section 63(a), but merely provides

“for, a method of liquidation, and the only claims under Sec-

tion 63(a) that require liquidation are those prowWded for

in clause 4: See Schall v. Camors, 251 U. S. 239. As a con-

sequence Sectfon 63(b) and Section 63(a) (4) really should

be read in ¢onjunction as follows ‘‘unliquidated claims

against the bankrupt, founded upon an open account, or

upon a contract express or implied, may, pursuant to ap-

plication to the Court, be liquideted in such manner as ‘it

shall direct, and may thereafter be proved and allowed

against his estate.’

It therefore clearly appears from the foregoing that the:

second and third sentences of Section 5067 were substan-

tially carried over into the Act of 1898 and are now to be

found .in Section 63(a)(4) and Section 63(b). The only-

changes made in the transition were two: first, the second

sentence of Section 5067 providing for the proof of claims

in conversion was replaced by the provision: in Section

63(a). (4) for claims founded upon ‘‘implied contract’’,

i. e., claims in quasi contract based upon .a waiver of the

tort (Schall v. Camors, 251 U. S. 239); and, second, that

the words.‘‘anliquidated damages’’ in the third sentence

of Section 5067 were replaced by the words ‘‘ unliquidated

claims”’ in Section 63(b). The first of these changes re-

_ quires no comment because it is clear that an action upon

implied contract arising from waiver of the tort is the same _

as an action for unliquidateg“damages for a converted

chattel. The second of these changes obviously was made

because required by the first change. There cannot be a

claim for unliquidated ‘‘damages’’ based on an implied

contract and therefore Congress used the word ‘‘claims’’.

It is next to be pointed out that the provisions of Sec-

tion 5070 providing for the proof of claim by sureties in

the name of the creditor are now found in Section 57(i) ‘of

the 1898 Act and General Order XXI, subdivision 4.

It thus appears that there have been omitted from Section 63

of the present Act any provision at all equivalent to the provisions

of Sections 5068 and 5069 of the Revised Statutes providing for

the proof of contingent claims; and there have also been omitted ©

the provisions for the provability of a proportionate share of rent

as found in R. S. 5071.

The conclusions from these deliberate inclusions and

omissions are entirely clear; it cannot be doubted but that

the able lawyers who had the question of a new Bank-

- ruptey. Act under consideration for years prior to its en-

actment and who had knowledge of the provisions of

the 1867 Act and the provisions thereunder, deliberately

omitted the express provisions for the proof of contingent

claims as found in the 1867 Act. Moreover the Bankruptcy

Law of Great Britain then in force and all prior ones had

contained specific provisions with respect to contingent -

claims and the precise method of their ascertainment and

these had been strictly construed. 46 and 47 Vict. C. 57

(1883); Williston, Cases on Bankruptcy (2nd Ed.), note

pp. 480, 481, 32 and 33 Vict. C. 71 (1869).

Congress having copied into the Act of 1898 the pro-

visions for the proving of claims on contract; having pro-

vided for the proof of implied contracts as the equivalent

for the proofs of claim in tort arising out of unjust en-

richment; having provided for the liquidation of unliqui-—

dated. claims arising upon contracts; and having deliber-

ately omitted all reference to contingent claims,.it cannot .

be successfully argued that it was intended by mere im-

plication to extend. the meaning of the language thus sub-

stantially copied from the earlier Act to include contingent

claims. Having omitted all reference to contingent claims,

"Congress did not intend to “smuggle in’’ those very pro-

visions ‘‘by muffled words.’”*

The question as to the effect of the deliberate omission

from the 1898 Act of provisions found in the 1867 Act. has

been before this court in*several cases. Thus i in Pirte v. |

Chicago Title & Trust Co., 182 U. S. 438, was involved the

question of fe right of a ‘creditor to prove a claim after .

innocently receiving a preference, without returning the

property thus received. The court first quoted the provi- *

sions of the Act of 1867 which stated that any person who

accepted a preference having reasonable cause to believe

that the same was made or given by the debtor contrary to

the provisions of the Act could not prove the debt, until the

preference was surrendered. And the court italicized the

following words ‘having reasonable cause to believe that

the same was made by the debtor’’. ‘The court then said at _.

| page 448: 7

‘‘The words in italics are omitted from the act

of 1898. Was. the omission without purpose? ©The

omission of a condition: is certainly not the same

thing as the expression of a condition. Was it left

out in words to be put back by construction? Taken

from the certainty given by prior use and prior deci-.

sions and committed to doubt and controversy? There

is a presumption against it. , When the purpose of a prior

law is continued usually its words are, and an omission

of the words implied an n of the purpose. This

rule we lately applied fn Bardes v. First National

Bank of Hawarden, 178 U. S. 524. In that case, in

_ determining whether the jurisdiction of the Circuit

and District Courts,of the Unifed States was con-

*See Mr. Justice Holmes in Davis v. Pringle, 268 U. S. 315.

\ 38.

current with the state courts in certain suits at law

and equity between the assignee: in bankruptcy and

the adverse claimant of property of the bankrupt, the

statutes of 1841° and 1867 were compared with that

of 1898, and from the omission from the latter of

certain provision of the former statutes it was de-

cided that such jurisdiction did not exist. It was |

said by the court, speaking by Mr. Justice Gray:

‘We find it impossible to infer that when Congress,

in framing the act of 1898, entirely omitted any simi-

lar provision, and substituted the restricted provi-

sions of ‘section 23, it intended that either of those

courts should retain the jurisdiction which it had un-

der the obsolete provision of the earlier acts.’ ’’

Language more appropriate to the present situation

could not be conceived.

See, too, Davis v. Pringle, 268 U. S. 315, which dis-

cussed the effect of changes in the 1898 from similar provi-

sion in the Act of 1867 with. respect to priority. to be ac-

corded debts due the United States and similarly refused

to incorporate by implication and construction into the 1898

Act provisions expressly set forth in the 1867 Act but not

brought over into the Act of 1898. - .

One further fact is to be emphasized. Section 5068

particularly nrovided that the creditor may at any time

* apply to the court to have the present value of the contin-

gent debt or liability ‘‘ascertained and liquidated’ and in’

addition provided for the liquidation of damages in Section“

5067 on presently due claims on contract. The Act of 1867

thus made a distinctiof between the ascertainment and

liquidation of claims mn A er that contingent claims

should be ‘‘ascertaihed’’ whéreas presently due claims for .

damages should be liquidated. The Act of 1898 however

provides only for the liquidation of claims and that is the

same provision which was already in the 1867 Act in addi-

_ tion to the provision for ascertainment and liquidation.

As said in Guarantee etc. Co. v. Title Guaranty & S. Co.,

‘224 U.S. 152, all of these changes were not ‘‘inadvertent”’.

*The Bankruptcy Act of 1841 also contained provisions for the allowance

of Contingent Claims. (5 Stat. 440, Section 5).

°- % ; : J s e

In. addition, Congress. must have known that Judge

- Lowell, who was probably the most learned of the Federal

Judges interpreting the Act of 1867, had held that claims

for rent and damages under: leases were not provable

.., despite the general ‘provisions for the proof of contingent

claims in the Act of 1867.

| Ex-parte Houghton, 1 Lowell 554.

They also knew that as early as 1882 Judge Lowell him-

self had prepared a bill specifically providing for the al-

lowance of claims growing out of leases, and yet no provi-

sion of any kind covering this subject was included in the

1898 ‘Act. '

See |

H. R. Rep. 65, 55th Congress, Second Session,

| page 28 (1898) ; |

See. |

The Lowell Bill, S., 1382, introduced in the 47th

Congress, Second Session in 1882, and set forth

in 14 Congression Record, pp. 43-49.

At page 28 of the said House Report 65, it was stated:

‘‘When the agitation of a new bankrupt law began

some years ago, Judge Lowell of Massachusetts drew

a bill which attracted the general attention of the |

country. In the West and South, however, it was be-

lieved to be too severe in some of its views. Out of

the discussion among friends of bankruptcy legisla-

tion grew the Torrey bill. Judge Jay L. Torrey,.a

Western man, gave the subject special attention, and

presided over three national conventions held to dis-

cuss and perfect a bankruptcy bill. His bill was sub-

mitted to many jurists and lawyers East, West and

South, and the result was a bill believed to be free

from the severe features of former laws and other

proposed legislation.’’ . .

The Lowell Bill of 1882 above, referred to and with -

which Congress was evidently familiar contained the fol-

| ae

lowing provision with respect | to what claims were prov-

able: ;

| “Sec, 60: That the following debts and liabili-

ties, and_no others, shall be provable in bankruptcy :

Batis ’, all damages suffered by reason of the rejec-

tion by the trustee of a lease, as hereinafter pro-

vided; * * *,

“T netee—Bawen. 2a

‘‘Sec. 61: That the bankrupt shall not be en-

titled to’ the benefits nor be bound by the covenants

or engagements of any lease held’ by him at the time

‘of his bankruptcy, but such lease shall be deemed to

be surrendered so far as he personally is concerned. |

x The trustee may decline the lease at any time, not-

. withstanding that he may have endeavored to sell

‘ the same, or have exercised acts of ownership in re-

spect thereto: Provided, That the landlord or any

creditor may, in writing, require him to elect, with-

in twenty days after such notice, whether to accept

or decline the same; and the failure to accept within

. ~ such time shall be deemed a declination. When a

: lease is declined, the landlord may have any damages

he shall suffer thereby assessed, as theeourt shall

direct, and prove the amount as a débt in bankruptcy.

Such declination shall not affect any right of the

trustee to deal with fixtures belonging to the bank-

rupt.’ ”

‘¢ And any person so liable for the bankrupt, and

| who has not paid the whole of such debt, but is still

liable for the same, or any part thereof, may if the

creditor fails or omits to prove, such debt, prove the

same in the name of the creditor, if known, if not,

in his own name, and the Court shall take care that

the dividend is so paid as to diminish the original

~ debt.’’ | ro.

The reports of the committees in Congress have been

examined and beyond the extent indicated throw no light

on the question. They--do not show that in using. the

- words ‘‘founded on open account or on contract express or

implied’’, Congress intended to re-enact, by indirection and

by implication the express provisions of the 1867 Act with

respect to contingent claims, and by those general words

to ‘‘smuggle in’’ every possible kind of a contingent debt

expressly provided for, t@h as to provability and method

of ‘“ascertainment’’, in the 1867 Act. | ce a aed

As said by Mr. Justice Holmes in the Filene case, 245

U. S. 597, 601: : :

‘‘When a statutory. system is administered the

only question for the courts is what the statutes pre-

-seribe.’’* 7

Fina’’y it is to be noted that consistent with its omis-

sion of contingent claims from, Section 63 Congress pro-

vided in Section 57a that proofs of debt shall set forth ‘‘that

the sum claimed is justly owing from the bankrupt to the

creditor.” ; | a

| In view of the foregoing, it is submitted that Congress

in 1898 deliberately omitted the provisions for proving con-

tingent claims contained in the 1867 and 1841 Acts and that

these provisions, to use the language of the Pirie Case, 182

U. S. 438 cannot be put back by construction. Contingent

claims such as are heré involved were not intended to be

either provable or dischargeable under the Act of 1898.

1. The decisions of this court and the lower Federgi courts

clearly establish that claims which will become due and

enforceable only upon the occurrence of a contingency not

reasonably certain to occur are not provable.

Until the recent case of Maynard v. Elliott, 283 U. S.

273, no one could have contended that claims such as those

of petitioners were provable. Petitioners in effect contend

however that the Maynard case makes all claims founded

upon a contract provable under clause 4 of Section 63a, re-

gardless of whether it is uncertain at the time of the bank-

ruptey whether the claim will ever mature and become pay-

*Another application of this principle is foynd in the cases of Davis v.

Pringle, 268 U.S. 315 and in Price v. U. S., 269 U. S. 492. In the former

a debt due the United States was denied priority in bankruptcy whereas in the

latter,such a debt was granted priority in an equity receivership. .

42,

able and enforcible. - Under this interpretation, Maynard

v. Elliott was certainly an astounding departure from all

the past rulings of this court under the 1898, 1867 and 1841

Acts. This interpretation is unsound, however. Maynard

v. Elliott did not lay down any such broad rule. Indeed

_Maynard-v. Elliott is entirely consistent with the previous

decisions of this court.

After all, claims absolutely owing though not payable

are contingent in a certain sense; they are contingent on

the element of time. This contingency, however, since it

is one certain to occur, has specifically been declared by

Congress to be unimportant and one to be disregarded.

(see Sec. 63(a) 1.)

Claims are, however, Sait contingent on some.

_ event other than time. Where the occurrence of such con-

tingencies is entirely within the control of the creditor, it

is exactly similar in nature to the contingency of time. For

all practical purposes such a contingency like the contin-

gency of time, is certain to occur beeause the creditor, it

may safely be assumed, will see that it does occur. So

also whether a claim will become absolutely due and pay-

able frequently depends on the occurrence of some other

contingency which experience shows is for all practical pur-

poses certain to occur.

Where the enforcibility of claims is dependent upon a —

contingency so.like in nature to the contingency of time,

there is no legal or practical reason for treating it differ-

ently from a claim contingent on the element of time.

There is certainly no reason to, suppose that Congress meant

to draw a distinction between debts certain to occur, which

are dependent upon the contingency of time, and debts cer-

tain for all practical purposes to occur which.are contingent

on some other element.

As a consequence this court in Williams \ v. ‘Fidelity Co.,

236 U. S. 549, held a claim provable because it was reason-

ably certain so to become, though at the time of bankruptcy

it was neither due nor payable; and this even though the con-

tingency was not within the control of the creditor. In that

case, a surety’s claim against a bankrupt was held prov-

able and discharged even although the surety agreement

was one of indemnification and the surety had not paid the

creditor at the time of the filing of the petition. In that

case, however, it was certain at the time of the filing of the

petition that the surety would have an enforceable claim

against his bankrupt principal because his principal had

before bankruptcy breached the principal obligation and

was then insolvent and experience shows that creditors

whose principals are insolvent usually pursue the surety.

Maynard v. Elliott, supra, merely marks another appli-

cation of this same narrow doctrine. The claim there was

one contingent upon the occurrence of something entirely

within the creditor’s control. The claim was one which

would become enforcible and payable at the election of

the creditor. As revealed by the record,* the maker of the

note was already discharged. in bankruptcy at the time of

the filing of the petition in bankruptey against the indorser

and all that the creditor would have to do in order to make

his claim enforceable, would be to give notice of dishonor |

and protest.** It is true, of course, that the opinion does not

disclose specifically the fact that the maker was already in-

solvent, but that the court was aware of this fact and was

merely applying the narrow doctrine stated above is amply

clear from the opinion which states that the contingency of

notice of dishonor was within the control of the creditor and

implies that this was the only contingency preventing the

claim from maturing. Had the Court not been aware of the

maker’s insolvency, if is little likely that it would have said

that the ereditor’s claim was certain to become enforceable

upon the giving of notice of me pi and presentment. It

is submitted moreover that thé court did not mean to hold

that the possible insolvency of fhe maker at the maturity |

of say a ten-year note who was entirely solvent at the time

of the indorser’s bankruptcy was a contingency within the

creditor’s control. :

*See Transcript of Record of that case at pages 11, 17 and 26.

** Even this the Court finally said was unnecessary, 283 U. S. at 279.

That the Court in Maynard v. Elliott recognized the nar-

row limitation of the doctrine which it was expounding is

made even more clear from the following quotation:

‘‘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, 186 Fed. 312. Such

a claim could not be proved under the Act of 1841

although in: terms ——"s proof of contingent

claims. Riggin v. Magwire, 15 Wall. 549.”’ See 273

U.S. at 278. ‘

The Court thus made it clear that claims contingent in

_ existence upon the occurrence of eyents not reasonably cer-

tain to occur because not within the control of the creditor

or because their occurrence is shown by experience to be too

fortuitous, are not. to be treated the same as debts abso-

lutely owing but not payable beeause dependent upon the

contingency of time. Such claims, said the court, are not

provable and the cases cited by it amply bear it out.

In Merrill & Baker, supra, an obligation was secured

by collateral and the creditor agreed to pay the difference

- between the face of thé obligation and the actual amount

realized from the sale of the collateral, if not paid by the

bankrupt. This claim was held contingent and not prov-

able and this Court in the quotation above said that this

was ‘so because the contingency was beyond the control of

the creditor and dependent upon an event so fortuitous as

to make it uncertain whether liability would ever attach.

As pointed out above the claims in the cases at bar are

equally dependent upon a fortuitous event namely, .the

amounts for which the leased premises will be actually re-

rented during the balance. of the term.

So also the claim in Riggin v. Magwire, 15 Wall. 549,

which arose under the Act of 1841 (which specifically pro-

vided for the proof of contingent claims) was held not prev-

‘ 2 ‘

able because it was not reasonably certain at the time of

the bankruptcy whether it would ever become due and pay-

able. In that case the creditor’s claim would become pay-

able only if the bankrupt’s wife survived the ‘bankrupt.

This Court,held this claim not provable because at the time

‘of bankruptcy it was unpredictable whether the wife would

survive.

Another ease which the court might well have cited for

this same proposition is Dunbar-v. Dunbar, 190 U. S. 340.

There the bankrupt would become liable only if his former

wife remained single and, therefore, at the time of bank-

ruptcy it was impossible to predict whether the bankrupt

-would ever become liable. The court therefore held that

the claim was not provable and therefore not discharge-

able. | |

So in this case whether the petitioner’s claims will ever

become due and payable was unpredictable at the time of

bankruptey. There was no reasonable certainty that even

if there was a reentry there would be an actual loss, inas-

much as under the covenants here. the existence of an actual

loss would depend upon the actual amounts at which the

properties would actually be relet. |

2. The decisions of this Court and the lower courts also clearly

establish that claims which are speculative in amount are

not provable. The bankruptcy courts have always refused

to substitute their present prophecy of the future for the

actuality of the future...

In Maynard v. Elliott, supra, the Court took particular

pains to point out that if a claim was so speculative at

the time of the bankruptcy that there could be no valuation,

it was not provable. It ‘stated that the amount of a claim

might be dependent upon the occurrence or non-occurrence

of contingencies and that if it was impossible to predict

whether the contingency would occur, the court would not

speculate on the possible amount of the claim which the

creditor might have. It said:

‘‘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 di-

vorced 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;

see Atkins v. W nem, 105 Fed. 595.”’ — 273 U. S. at 278.

The case cited by he court, Dunbar vy. Dunbar, supra,

is directly in point and decisive of this ¢ase. As already

pointed out the claim there was contingent in existence on

whether the wife would remain single. It was also there-

fore contingent in amount because the amount of the claim

would. depend on how long the wife remained single and

that was unpredictable at. the time of bankruptcy.

Petitioners contend that courts often exercise and .

pass judgment on the future acts or events in estimating

damages and that there is no reason why they-cannot do the

same here. That same argument was applicable in Dunbar

v. Dunbar and in the other cases analyzed above. It might

_ therethave been argued that juries frequently assess dam-

ages for mental suffering and that that is more speculative

than estimating how long and whether a woman is likely

to remain unmarried. There are statistics on that. Indeed

in Dunbar v. Dunbar the argument was made that in Eng-

land a court had already made an estimate as to how long

a woman would remain unmarried.

Despite this the court refused to hold the claim in the

Dunbar case provable. There must have been a reason

and it is submitted that it is this. The cases to which

petitioners point as analogy, as being cases-where the courts

have exercised their judgment for the ‘future, are cases

-where plaintiff had a present enforceable cause of action.

In such case, a court has no alternative but to use its esti-

mate of the future. Plaintiff possessing a present ‘cause,

the court in all justice must guess. Indeed if it does not

the Statute of Limitations may run. But when he has not

a present but a future cause, courts refuse to guess. They

refuse to substitute their prophecy of the future for the

actuality of the future and remit claimant to that actuality.

| ae | a

teh "

FEN

~~ *

This Court refused e make such a prophecy in Dunbar

v. Dunbar and in the cases analyzed above:

No case has been found in this Court where a claim con-

tingent both as to existence and valuation was held prova-

ble. Dunbar v, Dunbar and Riggin v. Magwire, both supra,

held that claims so doubly contingent must be remitted to

the actuality of the future and are neither provable nor dis-

chargeable. See also In re Merrill € Baker, 186 Fed. 312.

Conclusion to Point III.

It is submitted, therefore, assuming the court will reach

this question despite the contention that these claims are

contractually barred, that it has been shown that (1)

Congress in enacting the Bankruptcy Act of 1898 and de-

liberately omitting the provisions respecting contingent

claims contained in the 1867 Act and the British Act then in

foree did not intend contingent claims of this character to

be provable and dischargeable and (2) that’ no decision in

this court holds otherwise, but on the contrary that the

decisions in Merrill v. Baker and Dunbar v. Dunbar clearly —

recognize that claims of this character are not provable.

POI NT IV.

Petitioners’ Brief.

The elaborate brief of the petitioners, with its wealth

of citations, fails to discuss and meet the essential points

involved in these cases. The brief in reality is based on

the rather plaintive argument that claims for damages for

the loss of future rents ought to be provable in bankruptcy,

as the petitioners see the situation, and that therefore a

way must be found to make them so. To reach their desired

result, petitioners boldly ask this court to usurp the func-_

tions of Congress and to, legislate amendments into the

Bankruptcy Act so as to make it as broad and comprehen-

sive as the provisions of the English eek atend Act in

a aos

effect prior to 1898 (which act Congress did not deem it |

wise to follow) or as broad and comprehensive as the

amendments tentatively proposed by the Comm#tee re- _

ferred to at pages 6 and 7, supra.

Petitioners ask the court to-ignore— ,

(1) The solemn and unambiguous covenants of the par-

ties fixing their rights;

(2) The law of leases established for centuries ;—

. (3) ‘The settled rule of construction of the Bankruptcy

Act of 1898 resulting from the omission of the provisions: of

the Act ‘of 1867 and the clear limitations upon the prova-

bility of claims as set forth i in Sections 63 and 57 (a) of the

¥898 Act.

(4) The applicable cases respecting contingent claims.

Having thus blithely brushed aside history, precedent,

_and express provisions of the present statute, petitioners

conclude that the-court below erred—

‘‘in holding that the claim for damages for loss of

future rent was not as a matter of law a provable

debt.’’

Stripped of verbiage, the gist of their argument is this:

All the express covenants of the leases providing for .

forfeiture, reentry and damages are to be ignored and the

following new rule established.. If a tenant in possession

of real estate becomes a bankrupt, the landlord in the ab-

sence of statute or express covenant may reenter the leased _

premises after bankruptcy and revertheless have a prov-.

able claim for damages against the bankrupt and his

estate. Perhaps that should be the law. If so, Congress

will act in the future (See possible legislation, p. 7, supra).

Throughout their.argument, however, petitioners ignore

the fact that they have reentered and taken the property

and thus terminated the lease. They urge that the situation

is analogous to a breach of an executory contract by antici-

pation or otherwise. The argument, however, does’ not

_ bear analysis. It ignores the nature of leases and the re-

spective rights of the parties growing therefrom.

At. common law, oovenante of leases were independent

and even actual failure to pay rent did not terminate the

lease. |

_ 2 Tiffany on ‘ane and Tenant (1910) p. “1364.

2 Williston on Contracts (1920) §890.

Michaels v. Fishel, 169 N. Y. 381.

Thompson-Houston Electric Co. v. Durant Land

Improvetent Co., 144 N. Y. 34, 44.

A fortiori, therefore, bankruptcy was held not to termi-

nate the lease. See Judge Mack’s opinion in Western Elec-

tric Co. v. Powers Accounting Co., annexed hereto at page

Furthermore, ignoring for the moment the covenant of

indemnification, reentry by the landlord upon breach of a

lease pursuant to a covenant in the lease, operates both at

‘common law and by the laws of New York today as a termi-

nation of the lease and relieves the tenant and his estate

from all claims for damages. -

1 Tiffany on Landlord and Tenant (1910) p. 1174.

Gardiner v. Butler Co., 245 U.S. 603.

Hall v. Gould, 13 N.Y. 127.

McCready v. Lindenborn, 172 N. Y. 400.

Sutton v. Goodman, 194 Mass. 389. |

“Moreover in claiming a right at common ‘law to termi-

nate, reenter arid claim for dgmages, not only do petitioners

ignore the covenants of the parties and the law of leases

stated above, but they also demand that the bankruptcy

court treat them better than other creditors.

A lease isisomething more than an executory contract.

It is,.as stated by Judge Mack in the Western Electric Co.

case a conveyance of an interest in real property, a chattel

real. See infra at page 54. A lease is, therefore, like a con-

tract, partially executed on one side, like a contract for the

sale of personalty or realty in which the seller has trans-

ferred title and possession and the purchaser has not yet

paid the purchase price. Upon repudiation by the buyer,

the seller of personalty in the case supposed above could

sue for the purchase

price if the time for perforinance had

arrived. ee

3 Williston on Contracts (1920) § 1458:

1 Williston on Sales (1924) § 511.

Perhaps he also could rescind.

Ankeny v. Clark, 148 U. S. 345.

The seller of realty might perhaps'‘rescind or sue for dam-

ages. '

3 Williston on Contracts (1924) § 1456.

But neither could have both. }

A creditor cannot both rescind, obtain restitution and

sue for damages. He must elect. _ | ;

Restatement of the Law of Contracts, § 384.,

Joannes Brothers Co. v. Lamborn et al., 237 N. Y.

207. |

Clark v. Kirby, 243 N. Y.295.

Cf. Grymes v. Sanders et al., 93 U.S. 55.

There is no reason why landlord should be treated any

differently and be permitted in effeet both to rescind and

elaim damages.

It must also be noted that there cannot be. an anticipa-

tory breach of a lease under the law of New York.

McCready v. Lindenborn, 172 N. Y. 400;

Cf. Kelly v. Security Mutual Life Ins. Co. 186 N. Y.

16;

Cf. Nichols v. Scranton Steel Co., 137 N. Y. 471.

Under the law of Nebraska the doctrine of anticipatory

breach of any contract, much less a lease, is repudiated.

Carstens v. McDonald, 38 Neb. 858; *

Following, Daniels v. Newton, 114 Mass. 530.

The law of the| Federal, Courts, both of this Court and

the lower Federal Courts is the same as to unilateral con-

tracts.

Roehm v. ove, 178 U. 8. 1, 17;

Operators Oil Co. v. Barbre, 65 Fed. (2d) 857.

See also Restatement’ of the Law of Contracts §318.

The above rules of law which apply in the case of re-

-pudiation of the obligation to pay rent by a solvent tenant

likewise apply in bankruptcy.

In re Pettingill & Co., 137 Fed. 143 quoted with ap-

proval in Central Trust Co. v. Chicago Auditorium Ass’n.,

940 U.. S. 581, 592. See page 24 supra for quotation.

The application of the foregoing principles of law to the a“

‘nstant eases leads to the following conclusions: Even if the

covenants of the leases can be disregarded (of course they’

-eannot be), nevertheless petitioners’ claims are not provable

because (1) reentry has precluded any claim for damages,

and (2) even if there had been no reentry petitioners would

have no claim for damages.

POINT V.

! Section 74 of the Bankruptcy Act added in 1933 does

not make the claims provable.

That section clearly applies only to claims filed in a°

' debtor’s proceeding for composition or extension. Further-

more that section provides that a claim for future rent

shall constitute a provable debt and shall be liquidated

under Section 63(b) of the act. The claims in the present

eases are not for future rent but are for damages. If

they were for future rent the balance of the term would

pass to the Trustee in Bankruptcy as an asset of the estate.

Here this cannot happen, for the landlords have reentered

and are seeking damages. Furthermore the section is not

made retroactiye and could not be made so as to enlarge

the classes of provable debts because it would unlawfully

interfere with vested rights—namely the vested right in

rem of a creditor at the time of the filing of the petitions

long befote the Statute was enacted. This vested right

a ae

’

was a a lien upon such part of the property ‘of the benkrent

as the amount of the creditor’s provable claim bears at.

that time to the entire amount of the prevable claims.

Board of Commissioners v. Hurley, 169 Fed. 92;

Chemical Bank vy. Armstrong, 59 Fed. 372, 378;

Serton x. Dreyfus, 219 U.S. 339, 345. 3

POINT VI.

The underlying theme of petitioners’ argument is the

alleged injustice of the present law. That there is such in-

juste is denied. Injustice there might really be to eredi-

- tors with certain claims against a bankrupt if these speculas ey

tive claims were to be proved.

In any event the salutary principle enunciated by this

Court in New Jersey v. Anderson, 203 U.S. 483, 490, is

: peculiarly apposite here:

‘*‘But considerations of this character, however

properly addressed to the legislative branch of the

government can liave ne place i in influencing judicial

determination. It is the provinee of the Court to

enforce, not to make the laws, and if the law works

inequality ithe redress, if any, must be had from

Congress.”’ ;

The ietgenents of the Circuit Court of ‘pon should

be affirmed.

| Respectfully submitted,

GODFREY GOLDMARK, _

as Amicus Curiae on behalf of

Irvine Trust Company as

Trustee in Bankruptcy of Me-

Crory Stores Corporation.

53 a

Opinion of Mack, J.

IN THE

. DISTRICT COURT OF THE UNITED STATES,

For tHe Soutnern’ District OF New York.

———

Western Exectric Company,

INCORPORATED,

Complainant,

against ; + B. -19—150

Powers AccounTInG MacHINE

Company,

Defendant.

CLAIM OF PREN-BROOK CORPORATION.

MeEmMorRANDUM OPINION.

Mack, Cireyit Judge: -

Defendant is lessee under three leases made before the

completion of the building,—two for ten. years from such

completion and one for ten years from September 15, 1920.

Rent was payable annually or quarterly in’ advance.

Receiver herein was appointed on October 18, 1920, on

defendant’s confession of insolvency and consent. thereto.

By agreement, with express reservation of lessor’s right

to terminate after October 8, 1921, under the clauses of the

lease permitting termination in the event of the appoint-

ment of a Receiver of the tenant, October 8, 1920, was fixed _

as the date of the completion of the building. Rent for one

year was paid. On October 8, 1921, the Receiver disaffiirmed

the leases without the lessor’s consent; thereupon lessor,

without accepting a surrender, took possession. Expressly

without prejudice to any claim, except to give credit for

‘rent paid, lessor leased a portion only of the space to the

Receiver from Oetober 8, 1921 to October 1, 1922. Another

portion was rented to another party for five years. ;

The claim as filed is for-the rent reserved after credit-

ing rents received or reserved under the relettings. .

The leases provided: ,

“That if at any time during the term above

specified, the lessee should become insolvent, or a

receiver of the lessee’s property should be appointed,

then in each of such cases it should and might be

lawful for the lessor, at the lessor’s election, into

and upon the demised premises or property, or any

part thereof, in the name of the whole, by process of

law or otherwise, to eriter and to have, hold, possess

and enjoy the same, and to terminate said lease; and

that the lessee in such ease should be liable for any

loss or deficiency of rent which might be suffered by

the lessor during the remainder of the term above

specified. ”’ .

A lease of an interest in real property is the croation

or grant of a chattel real; rent reserved is compensation

for the enjoyment of the interest during the period for

which the rent is paid ef is payable; neither insolvency nor

bankruptcy of the lessee affects the term created except as

the title thereto, unless rejected, becomes the property of the

Receiver or Trustee and the latter thereby is subjected to

payment of the reserved rent. If the interest be not ac-’

cepted by Receiver or Trustee either at once or retroactively

after a period during which the advisability thereof is un-

der consideration, the interest with the rental obligation

remains in and on the insolvent or bankrupt. Insolvency

or bankruptcy of itself creates no breach anticipatory or

otherwise of the rent obligation because it does not ter-

minate the leasehold estate.

In re Mullings Clothing Co., 238 Fed. 58, does not pur-

port to and does not overrule In re Roth & Appel, 181 Fed.

667 ; it distinguishes the effect of dissolution from that of

the bankruptcy of a corporation, in that the former ends

the corporation’s existence: therefore, it is held to effectu-

ate an anticipatory breach of the leasehold estate.

Neither bankruptcy nor equity proceedings under a

creditors’ bill legally ends the corporate life; ‘indeed, it

does not hecessarily end its business career; a composition

or reorganization or payment in full may be effectuated

with or without a balance of assets for the corporation.

There is no leg ifference in this respect between a cor-

porate and a personal lessee. i

The parties may, however, incorporate an executory

contract in the lease; that contract may, like other execu-

tory contracts, be broken by anticipation; such a breach

may, under circumstances, give rise to a claim provable

either in bankruptcy or in equity proceedings; it may in-

deed be deemed retroactive as of the date of the proceed-

ings even if actually created by the subsequent exercise of

an option exercisable because of or on the bankruptcy or

appointment of a Receiver.

That the claim was contingent, uncertain or unliquidated

at that time is not fatal to its proof, at least in equity pro-

ceedings, provided only that it can be made absolute, cer-

tain and liquidated within a reasonable time so as not to

impede the settlement of the estate.

Wm. Filene’s Sons Co. v. Weed, 245 U. S. 597.

If the leasehold interest, pursuant to some reserved

right, is terminated on or because of the insolvency or re-

ceivership, the obligation to pay rent as such necessarily

ceases, whatever right to damages may arise because of

some contractual provisions incorporated in the document ;

if the leasehold interest is not terminated, the obligation to

pay rent when and as it accrues remains on the lessee;

‘in neither case, therefore, can a claim against the bank-

rupt or insolvent estate for the reserved rent as such be

established.

Furthermore, if there be no contractual or statutory

provision for damages on such a termination, there is no

further liability either of the lessee or of the insolvent or

bankrupt estate.

Gardiner v. Butler, 245 U: S. 603.

If, however,-there be a contractual provision for dam-

ages on such a termination and-the measure of those dam-

ages fixed by the agreement be the difference at the time

of a termination between the market value of the lease and

’ the discounted value of the rents reserved, and if the ter-

mination be reasonably prompt so as to enable a liquida-

tion of the amount before the time for filing proofs shall

have expired, then at least in equity proceedings such a

claim is: provable.

Filene v. Weed, supra.

But, if as in.the present case, on such a termination

a lessee becomes liable not for an amount then ascertainable

but for the entire loss that the lessor may actually suffer

during the remainder of the original term, inasmuch as it

is clearly impossible to ascertain that loss until the original

term shall have expired,—in this case about nine y

the claim must be rejected as uncertain.

In re Roth & Appel, supra.

Penn. Steel Co. v. N. Y. ony Ry. Co., 198 Fed.

721, 759.

Nor can the Court adopt some other readily ascertain-

able measure of damages such as the one that would have

prevailed but for express specification of the method. of

determining the damages. The Court caynot alter the con-

tractual provisions; the parties have not agreed that the

lessee shall be liable for damages and then merely sug- _

gested a method of fixing them; they have provided that

on such termination, when but for the provision no dam-.

- 57 ; ‘3

ages could be claimed, the lessee ‘‘shall be liable for any

loss or deficiency of rent which may be suffered.’’

Not only is there therefore no basis for the claim as

filed for the full reserved rent, but even if it were amended

so as to charge an actual termination 'of the lease and in

respect to damages therefor to assert, contrary to the con-

tractual provisions a right to the difference between the

rents reserved and the actual rental value at the time of —

termination, it would have to be disallowed.

Objections sustained and claim disallowed.

April 14, 1922.

Juan W. Mack,

U. S. Cireuit Judge.

58 | 4

- Opinion of Wallace Macfarlane, Special Master.

ae UNITED STATES DISTRICT COURT,

| a Soutnern District or New York.

K 27-141.

Cuarues H. Mears,

Plaintiff,

against ,

J. M. GQiopina & Co. Inc.,:

Defendant. f¢

In the matter of the claim of

JaNE ScHUYLER Morse.

REPORT OF WALLACE MACFARLANE, SPECIAL MASTER.

To THE JUDGES OF THE District Court or THE UNrteEp States

FOR THE SouTHERN District or New York:

Pursuant to an order of this court duly made and en-

tered herein on the 14th day of March, 1924, by which

Wallace Macfarlane was appointed special master to take

festimony with respect to claims filed herein to which ob-

jection should be taken. by the Receiver, and to report to

this court his opinion and recommendations with reference

to such claims,—

I, the said special insite, respectfully report as follows:

APPEARANCES:

Messrs. Rosensera & Batt (Godfrey Goldmark, Esq.,

of counsel) for Leo A. Price, receiver of Gidding

& Co. Ine.

Messrs. Epwarp, O’LoucHiin & Grorce (Mr. O’Lough-

lin, of counsel) for the claimant.

On or about the 23rd day of April, 1920, Jane Schuyler

Morse, of New York City, leased to J. M. Gidding & Co.

Inc., a New York corporation, having its principal place

of business in the Borough of Manhattan in the City of

New York, ‘certain premises, in said borough and city,

‘known as No. 3 West 46th Street, for a term of twenty-one

years commencing on the first day of June, 1921, and

* ending on the 31st day of May, 1941, at an annual rental

of $16,000. payable in equal quarterly instalments on the

first days of June, September, December and March in

each year of said term. The lessee covenanted to pay the

rent and all taxes, and to perform certain other obligations

specified-in the lease, and also to deposit $8500. in U. 8S.

bonds as security for the performance of its covenants, and

jin ease of any application of the securety or any. part

thereof to satisfaction of the lessee’s covenants, it agrees

to keep the security good. The lease contains, also, :an

elaborate covenant for continuing the liability of the lessee

to pay as damages the equivalent of the difference between

the reserved rental and any rentals received on relettinig if,

‘before the expiration of the term, the lease should be ter-

minated by reentry of the landlord by summary proceed-

ings, or otherwise, for breach of any of the conditions of

the lease by the lessee authorizing such reentry, and that

such damages should be due and payable by the lessee to

the lessor on the several rent days specified in the lease.

also by appropriate words to a termination of the lease

- by notice to quit ‘‘if the lessee be adjudicated a bankrupt,

or make a general assignment, or take the benefit of any

insolvent act.’’? A copy of the lease is returned herewith

as claimant’s exhibit 2. |

Gidding & Co. defaulted in the payment of the rent

falling due September 1, 1923, and on September 11, 1923,

$4050. of-the U. S. bonds deposited as security were used

to pay this instalment of rent, and the lessee failed, on

demand, to keep the security good by restoring this amount.

The lenses also failed to pay the taxes ne due on May

1, 1923 amounting to $1274.10.

On October 2, 1923, a receiver of Gidding & Ce. was

appointed in this action. Gidding & Co., as appears from

its answer, joined in the application for the receiver, and

~ at the time of his appointment was and is insolvent.

By an order duly made and entered in this action on

or about, January 4, 1924, claimants were required to file

their claims with the attorneys for the receiver on or before

March 1, 1924.

‘On December 1, 1923, a quarterly instalment of rent,

$4,000. became due and was not paid, and on December 5

the claimant paid the taxes and acerued penalties for 1923,

amounting to $2609.85. ;

On December 19, 1923, the claimant demanded of the

receiver payment of the December rent and of the taxes

and ‘also, replacement of the impaired security, but the

received declined to comply with any of these demands.

‘Thereafter, the claimant, by permission of the court duly

obtained, (Ex. 3), gave the receiver and the lessee notice

of termination of the lease and also notice to quit in the

form and for the times specifically provided in the lease

(Exs. 4 and 5). Pursuant to said notice, and according

to the provisions of the lease, the lease expired on Feb-

ruary 6, 1924. Thereafter the lessor instituted summary

proceedings for the eviction of the lessee and the receiver

from the demised premises. In these proceedings a final

issued on February 19, 1924, which were duly served upon

the receiver and the lessee on February 26, 1924.

On or about February 28, 1924, the claimant filed with

the receiver her claim, duly verified, for $47, 156. 85, made

up of the following items: — |

‘614, By reason of all the foregoing said J. M.

Gidding & Co. Inc. is indebted to this claimant in

the following amounts:

61 |

Rent due December D FORD co vccveness ¢ -4,000.00

Taxes and penalties paid December 95,

OE fusud cnn pnedeesesansedunane “. 2,609.85

Face value U. S. Goyernment bonds,

which should have been replaced Sept.

4 ere Rete? 4,050.00

Damages on termination of lease for

breach of covenant as aforesaid. ... 36,497.00

$47,156.85

Together with interest on $4,000. from December

1, 1923—on $2,609.85 from December ‘5, 1923,—an

oe on $4050. from September 11, 1923.”’

The receiver admits the items for December rent, $4,000.

- and taxes and penalties, $2,609.85, both of which accrued

‘prior to the expiration of the time for filing claims. He

disputes the claim for diminished security, $4,050., and the .

claim for damages for the loss of the unexpired term,

$36,497. | é

This item of $36,497. represents the excess of the total

_ rent reserved for the unexpired term over the alleged-esti-

mated value thereof, which is stated in the claim (Ex.

1, subd. 13) to be $13,000. per annum. It is expressly

claimed, however, as damages substained by the lessor un-

der the lessee’s covenant to continue to be liable after the

termination of the lease for a sum equivalent to the amount

of all the rent reserved in the lease less the avails of re-

letting, such damages to be due and payable by the lessee

- on the several rent days specified in the lease (claim, ex.

1, subds. 1}-13). as

The receiver objected. to this item on the ground that

the lessee’s covenant for continuing liability after reentry

of the landlord provides specifically not only that the

measure of damages should be the equivalent of the differ-

ence between the rent reserved and the avails of reletting,

but also that such damages, so measured, ‘‘should be due.

and payable by the lessee to the lessor upon the several rent

eee |

days hereinbefore specified,’”’ that is to say, on the first

days of June, September, December and March in each

year; that this provision was exclusive of any other measure

of damages, and that the lessor was not entitled to claim

a present lump sum equal to the excess of the total, rent

reserved for. the unexpired term over the present value of

such a lease for the years it had still to run determined

by expert testimony. can 2

By agreement between the partiesgthe receiver has con-

sented thatghe claimant should offer fo prove her damages

for the lessee’s alleged breach of the covenant to remain

liable after termination of the lease, but objects to the com-

- petency ofthe proposed proof upon the ground above stated,

and the master has been requested to determine the validity

of the claim for this item of damages in order that the

expense of calling expert witnesses on both sides may be

avoided if the claim is not provable; and it is understood

that if the claim should eventually be sustained the amount

_of the item demanded is not admitted but must -be proved.

It seems to be apmittep 1n the briefs filed with the

master on behalf of the claimant that if her right to dam-

ages must be determined by the language of the lessee’s

covenant for continuing liability, the claim now made by

her under that covenant will not be provable; but it ‘is

argued.that the receivership and the insolvency of the

lessee constitute an anticipatory breach of this covenant,

relieving the lessor from its provisions in respect to pay-

men{ of damages and entitling her to prove her whole dam-

ageS as of the present time in a lump sum on the basis

of a comparison between the present value of the unexpired

term and the rent reserved for the seventeen years that the

lease has still to run.,

In her first brief filed with the iin her claim is stated

as follows:

‘The claim is not for-rent to accrue in the future,

it is not for breach of the covenant to pay rent, nor

is it for damages for loss of the landlord’s bargain,

but it is for damages for the anticipatory breach of

the contractual obligation on the part of Gidding &

Co. which came into existence only upon the termina-

tion of the lease.”’ ? :

And again in her reply brief the claimant argues:

‘The covenant is peculiar. It is not like any of

the covenants discussed in the cases cited by counsel

for the receiver. It is not in form a covenant to pay

the ‘difference’ between the rent reserved and the

proceeds of reletting, but, it is in the following form:

‘The lessee hereby agrees to pay to the lessor

the equivalent of the amount of all the rent re-

, served herein, less the avails of reletting, if any,

and the same shall be due and payable by the les-

see to the lessor on the several rent days above

. specified.’

‘This’ is not a covenant to pay such damages as

- may be suffered from time to time as and when they

; shall be ascertained, but it is a positive promise to

pay the amount of the rent reserved in the lease,

' subject, however, to a deduction. The result may,

as a practical matter, be the same as would flowfrom

the other sort of covenant, but it may be said that .

here is a recognition of the fact that the rental value

of the premises was and would be less than the rent

reserved, and that, therefore, the avails of reletting

would be less. :;

Under these circumstances, it cannot be said that

the claim was contingent but only that its amognt

was uncertain.’’

The effect of this alleged anticipatory breach is the only

point to be decided.

The decision of the point submitted is necessarily de-

_ termined by—-

(1). the cancellation of the lease on February 19, 1924,

by the issuance of the warrant in summary proceedings,

and, ;

(2) the language of the special covenant or agreement.

contained in the lease continuing the personal liability of .

the tenant,

64 |

_ In respect to the provability of claims in equity receiv-

erships, the rule stated by Judge Noyes, writing the opinion

of the Circuit Court of Appeals for the Second Circuit in’

Pennsylvania Steel Co. v: New York City Railway Co., 198

Fed. 735, has been generally approved:

- All claims ought to be in before the accounts

are made up for distribution, and there should be

no opportunity for uncertainty, delay or expense in

_Teopening or recasting them. A narrower rule can

be adopted which would obviate any difficylty in this

regard: and which would be simple, eftitable and

workable. It is this: Claims which when presented

within the time limited by the court for their pres-

entation are certain or are capable of being made

certain by recognized methods .of computation,

should be allowed. Claims which are not then cer- -

tain should be disallowed because they afford no

basis for making ‘dividends. But there is no equi-

table reason why claims which are certain when pre-

sented and which are presented in time should have

_ been certain at some arbitrary-anterior period.’”’ -

This rule is cited with approval in Filene’ Sons Co. v.

Weed, 245 U. S. 697, 601 and with more precise statement

- in Samuels v. Drew, 292 Fed. 734; 736 (C. C. A. 2d Cire.)

The lessee’s al heed ‘tanticipatory breach’’ of the cove- —

nants of the lease to-pay rent and taxes and perform other

obligations as tenant, was a consequence of its insolvency

and the receivership. The lessee thereby became unable,

and the receiver réfused, to perform any longgr the cove-

_ nants of the lease imposing obligations upon the Jessee as

tenant. This breach led to the termination of the lease and

the annulment of the relation of landlord and tenant. The —

termination of the lease and the reentry by the landlord ~

through summary proceedings brought into active opera-.. —

tion the agreement continuing the personal liability of the

lessee, which, though contained in the lease, was wholly

unconnected with the use of the land. This special agree-

ment provides with completeness and precision just what

the continuing liability of the former tenant for damages

ar - 65

should be, how the damages should be ascertained and even

when they should become due and payable. Without this

special agreement, the tenant, after the reentry of the land-

lord by summary proceedings would have been urider no

further liability qt all arising out of the lease proper. (C.

P. A. 1434; Hall v. Gould, 13 N. ¥,127; Michaels-v. Fishel,

169 N. Y. 381, 387; Gardiner v. Billter, 245 U.S. 603.)

To say that the. anticipatory breach arising from the

receivership, aS a consequence of which the landlord re-

entered and annulled the lease, was also a breach of the

special agreement of the parties providing what their re-

spective rights and liabilities should be upon such a re- |

entry for such a breach, is an untenable argument. The

anticipatory breach in this case affected the special agree-

ment for continuing liability only by giving it vitality and —

operative effect. In the claimant’s brief it is stated that

“the special agreement for continuing liability of the tenant

in. this lease is peculiar und unusual, and stress is placed -

upon thé use of the word ‘‘equivalent’’ in the, tenant’s —

agreement to'pay to the lessor after termination of the

lease, ‘‘the equivalent of the ‘amount of all the ‘rent re-

served herein less the avails of reletting’’ ete. The form

“of the covenant in this lease does not appear to be unusual.

The covenant quoted in Seidlite v. Auerbach (186 App. Div.

7, pp. 8-9; rev. 230 N. Y. 167) is almost literally the same

except that it omits the provision for peritdic payments.

In such covenants the word ‘‘equivalent® is used. to indi-

cate that the tenant’s continuing liability after the termina-

‘tion of theslease is not technically for ‘‘rent’’ but for “*dam-

ages’’, though measured in terms of rent by the excess of

the rent reserved over rent received on reletting during

the unexpired term. In an early case in New York the con-—

tinuing liability was stated in the complaint to be for rent,

and though the Court of Appeals held that this was: im-

‘material and-the word ‘‘rent’’ would be construed to mean

‘‘damages’’, there was a strong dissent (Hall v. Gould, 13.

N. Y. 127). ‘The word ‘<equivalent’’ is used to avoid this

objection. -

Bprecia ugree-

' SAF

‘And the same shall be dus and payable by the

‘lessee to the lessor on the several rent days above

speci fied” "mee

The construction of the provision of

ment—

is well settled ws authority, (McC reals v. Lindenborn, 172

N.Y. 400). In that case the covenant for the continuing

liability of the tenant provided that the tenant should pay

as damages (p. 402)—

“The difference. between the -nmount of rent

hereby reserved and the amount-of rents which shall

be collected and. received * *°*. from the demised

premises during the residue of the said term * * *

in equal monthly payments as the amount of such

differeng shall from time to time be ascertained.”

The court said, construing this covenant (p. 407)—

‘*By the express contract of the parties a sepa-

rate and independent cause of action arose under

this covenant every month when there was a defi-

ciency. ascertained in the manner provided. The

_ plaintiff was at. liberty to allow the causes of action

. for monthly deficieney to accumulate and to recover

upon several at tlie same time, but she could not. ré-

cover any deficiency until it had actually accrued and

had been ascertained in me mode provided by the

covenant. rg

The court ae this decision on the eround that, after

the termination of the. lease by the landlord’s reentry, the

. tenant was under no further liability-upon the lease, as.

such for payment of rent or performance of any other obli-

gation as tenant, and that his continuing liability for dam-

-agés must be determined entirely by the terms of the spe-

cial agreement for such liability. ae

“The court emphasized also the rule that-—

‘“When the parties by their contract provide for

the consequences of a breach, lay down a rule to ad-

measure the damages and agree when they are to be

, paid, the remedy thus provided must be exclusivély

followed dost wit as

The authority of McCready ow. Lindenborn is unim-

paired and the agreement@n the lease from Mrs. Morse to

Gidding & Co. in the present claim that the damages shall

be ‘‘due and payable by the lessee to the lessor on the-sev-%

eral rent days above specified’’; that is to say the first days

of June, September, December and March of each year—

is just as precise and specific as the covenant in McCready *

y. Lindenborn. i. | ;

It is argued, on behalf of the claimant, that McCready

y. Lindenborn does not apply and that even if it did its |:

authoriLy has been weakened by the degsjon of the Appel-

late: Division in’ Darmstadt v. Knickerbocker Chandelier

(o., 18% App. Div. 12%. afer ae |

It does not apply, the claimant argues, because in

- McCready v. Lind¢nborn there was no anticipatory breach ;

but the lease in that case provided that if the premises be-

came vacant the landlord might reenter. and. relet.them as

agent of the tenant, and that on default in the performance

of any of the covenants of the lease the relation of land-

lord and tenant, at the. option of the landlord, should cease

and determine. “The exercise of this option was, of course,

proved by ‘the landlord’s reengry. As already shown, the

alleged anticipatory breach reshiting from the insolvency

of Gidding & Co. and the appointment of a receiver, Was -__

‘not a breach of the covenant for continuing liability but.

operated, through the consequent annulment of the lease, —

to make that covenant effective. | ea |

There is nothing. in the decision of the Appellate Divi-

sion in Darmstadt v. Knickerbocker Chandelier Co., 188

provision for monthly payments of the damages. The

covenant in the lease in the Darmstadt case contained no

‘Provision at all for périodic payment of damages by the

former tenant after the termination of the lease by sum-

mary proceedings, but provided that in the event of reentry.

by the landlord by such proceedings, the landlord might

Va *

FW AUSS Fo

App. Div. 129 that ineany way weakens the authority of ~

McCreacy v. Lindenborn which the court expressly distin-

guished on the obvious.ground that it contained an express —

. é :

- = of

- reletting to the payment of expenses and the rent due er

the lease, and that the tenant ‘‘should nevertheless revtain

liable for any deficiency.’’? Covenants in this form have -

expiration of the term-on th® ground. that until then thé

liability of the tenant cannot: be determined. . The Appel-

late. Term so decided and dismissed the ¢ mplaint, but the

Appellate Division while approving the decision of the-

Appellate Term, held that it must reverse because the Court

‘of Appeals in its then recent decision in. Mann v. Munch

| Brewery, 225 N. Y. 189, had decided, contrary to its former

rulings, that on a eovenant of continuing liability similar

E ' to the one before the court in the Darmstadt case, an action

could be brought before the expiration of the demised term.

_ This conclusion seems to have beeh due to a complete imis-

apprehension by the Appellate Division of the provisions °

of the lease before the Court of Appeals in Mann v. Munch

Brewery, in which the question before that court: was

__ Whether the defendant, who was ‘in possession as assignee

of the original tenant. and had been evicted in summary

proceedings, had assumed the covendnts of the lease. The

lease provided (225 N. Y., p. 194) that the tenant should

not be relieved from payment of rent by eviction in sum-

mary proceedings or by assignment of the lease and that

every assignee should continue to remain’ liable for the

payment f the rent and performance of all the covenants

and conditions of the lease. It. appears clearly enough, by -

‘ implication, from the portion of theslease quoted in the -

opinion of the Court of Appeals that the lease provided for

monthly payments of rent by the tenant, and_it is stated in

the opinion (p, 195) that the defendant assignee had itself,

after entering into possession, promised to pay the rent

monthly. An inspection‘of the record shows that the tenant

- covenanted to pay the rent—

relet as agent of the tenant, applying rents received }: a

5 al

.. “In equal-monthly payments * * * in advance on

the first day of each and every month during the

term aforesaid.’’

RS PM EME”? NET I CRT

69 f

* ‘The action was brought to recover only for the months that

- had expired at the time of the commencément of the action.

The Court of Appeals, having decided that the assignee had

‘ assumed the covenant to pay rent:monthly after eviction, -

simply enforced the covenant according to its terms. The -

case was in this respect, therefore, on all fours with

McCready v. Lindenborn which, indeed, is cited as author-

ity by the Court of Appeals on the.validity of the covenant .

for continuing liability (225 N. Y. 194). When the mis-

apprehension under which the Appellate Division labored

in the Darmstadt case in respect to the form of the cove-

nant, for continuing liability in Mann v..Munch Brewery

’ has been judicially gorrected, not improbably the decision

of the Appellate Term (104 Misc. 547) will be held to have _

been correct. However this may be, the case is not in point —~

in the present controversy. The-covenant in this case pro-

_ vides for a periodic ascertainment of the damages and is

directly within McCready v. Lindenborn, the authority of

' which is not questioned i in the Darmstadt case.

Other ‘authorities cited in the ‘briefs, while deciding

questions analogous to that presented by this claim, are

clearly digtinguishable. Those that involve the construc-

tion of a lessee’s covenants for continuing liability after.

reentry of the landlord and termination of the lease neces-

sarily turn upon the form of ‘the covenant, and it will be

found that apparent differences in the decisions are satis-_

factorily explained and, reconciled by comparison of the

‘covenants involved. In Filene’s: Sons Co.'v. Weed, 245

U. S. 598 and in the first claim allowed in Gardiner v. But-

__ler & Co.,; 245 U. 8. 603, the lessee agreed, in the event of — |

‘reentry and the termination of the lease, to pay the differ-

ence between the rental value and the rent and other pay- —

ments named in the lease for the residue of the term: These

covenants were, as the court held, agreements between the

parties that the evicted lessee should be liable for a present.

_ payment computed according to the familiar rule of dam-

ages accruing to a lessor for loss of the. profits of the un-

expired term. In such cases, the coutract provides for a

f , , @Q

present claim determined precisely in accordance- with an

agreed rule. . On the other hand, where the case présents a .

“covenant which provides that the tenant shall remain liable

during the unexpired term for the amount, or the ‘fequiva-.

lent’? of the amount, of all the rent reserved less the avails

of reletting, without any provision for periodic settlements,

the decisions hold with substantial uniformity, that the

lessor has no right of action until the completion of the

unexpired term, because until that time comes it is impossi-

ble to determine what the damages will be, or whether there

will be any damages atzall.. :(Seidlitz v. Atierbach, 186 App.

271; Harding v. Austin, 93 App. Div. 564). Substantially

similar are the bankruptcy. decisions upon covenants which

take the form of gy agreement. by the tenant to indemnify

the. denne during the xesidue of the term for ‘loss of rent

and other payments incurred by the termination of the

lease. (In Re Ells, 98 Fed. 967; In re Shaffer, 124 Fed.

111). The only conflicting decision on this form of cove:

Div. 7, 13, rev. 230 N. Y. 67; Matter of Hevenor, 144 N.Y... -

nant to which my attention has been called, or which I have —

been able to find, is the decision of the Appellate Division

in Darmstadt v. Knickerbocker Chandelier Coa., 188 App.

Div. 129, hereinbefore explained.

, In the third form of covenant, like that\in. this. case,

Ww chert the tenant’s agreement is to continue liable, after

eviction, for damages to be determined and paid from time

to time at the end of ‘specific periods during the residue of

the term, the necessary construction, both upon principle

in-any action he may bring to the damages that have al-

ready become due according to the terms of the contract.

The receiver argues that there can not be an ‘‘anticipa-

tory breach”’ of a unilateral agreement to pay money, like .

the covenant of the lessee to pay damages after the termi-

nation of the lease by reentry of the landlord for breach of

condition. It is not necessary to decide thispoint because

the determination of the controversy turns entirely upon

_the construction to be placed upon the agreement. actually -

“a

~~,

~_ .

expressed in the lease in which the parties have stated what

their respective rights and liabilities shall be- upon any

breach of the lease by the lessee leading to its termination

_ and.the reentry of the landlord. -In Central Trust Co. ve

Chicago Auditorium, 240 U: S. 581, the court held that an

adjudication of bankruptcy against one of the parties to an-

. executory contract to render services to the other, either -

before or during performance, which disables the bankrupt

from further performange, constitutes an anticipatory

breach and gives the injured partygéan immediate right ‘of

action within the doctrine of Roehm v. Horst, 178 U. 8.1.

Landlord and tenant cases cited in opposition to the claim,

including In Re. Roth and Appel, 181 Fed. 667, were distin-

. guished by the é¢ourt (p. 590) because of the ‘‘diversity be-

tween duties which touch the realty, and the mere person-

alty,’’ citing Co. Litt., 292, b. sec. 513. In In re Mullings,

238 Fed. 58, the doctrine of anticipatory breach was applied

to a lease made by a corporate.tenant which had instituted

a voluntary proceeding for dissolution before the ‘com:

‘mencement ofthe term, and afterwards was adjudicated a

bankrupt of its voluntary petition. In that case theré had

been no termination of the lease’by reentry annulling the.

relation of landlord and tenant, nor did the case involve any

éovenant or special agreement for continuing saan’ of -

the tenant after such termination.

This item of damages, therefore, in the claim presented

- to the receiver should be disallowed, not because it is con-

tingent and uncertain, but because it is contrary to the con-

tract between the: parties, which expressly provides: for .°

damages nreasured by the difference between the rent re-

ser: and the rent actually received from time to time on

: Teletting to be ascertained and paid quarterly. Obviously,

before it can be paid, it must be ascertained. Undoubtedly,

any claim in conformity with the contract covering any

period except the quarter falling due on March 1, 1924,

would have been uncertain and, indeed, impossible of esti-

. Mation, and, therefore; wholly contingent, because the rents

that would be received in future period could not be known

72 }

]

-and the avails of velettion might in many ‘quarters exceed

the rent reserved.

I return herewith: ~~ on- l y

(1) Stenographer’s minutes of proceedings before the

special. master. .: -s

7(2) Exhibits: —

; (1) Original cluim.

= (2) Copy, f lease from-Morse to Gidding & Co.

(3) C ma petition and order of January 14, 1924.

(+) Twenty days notice to lessee of lessor’s inten-

* tion to end the term, ete.

(5) Lessor’s demand mpen renever for. payment of. .”

' rent, taxes, ete.

~ All of which is voupestfully submitted.

Dated June 27, 1924.:

(Signed) , WALLACE MACFARLANE,

Special Master. -

° &

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