Opinion — Manhattan Properties, Inc. v. Irving Trust Co.

SUPREME COURT OF THE UNITED STATES.

Nos. 505 and 506.—Ocroser TerM,. 1933.

Manhattan Properties, Inc., Petitioner,) .

505 vs.

Irving Trust Company, Trustee in

Bankruptcy of Oliver A. Olson’ Co.,

Ine.

On Writs of Certiorari to

the United States Circuit

Court of Appeals for the

Samuel R. Brown, et al., Petitioners,[ Second Circuit.

- 506 vs.

Irving Trust Company, Trustee in

Bankruptey of United Cigar: Stores

Company.

[February 5, 1934. ]

Mr. Justice Roperts delivered the opinion of the Court.

These cases present the question wither a landlord may prove

in bankruptey for loss of rents payable in the future, where the

claim is founded upon the bankrupt’s covenant to pay rent, and, in

the alternative, upon his breach of a covenant that in event of bank-

ruptcy, the landlord may reenter, and if he does, the tenant will

indemnify him against loss of rents for the remainder of the term.

In No. 505 it appears that Oliver A. Olson Co., Ine., was the

lessee of premises for a term of nine years and eight months be-

ginning February 1, 1928, and expiring October 1, 1937. Defaults

in payment of rent due February and- March; 1932, were followed

by an involuntary proceeding in which the company was, on March

18, 1932, adjudicated a bankrupt. The total rent reserved: for the

portion of the term subsequent to bankruptey was $58,000, and,

as the claimant asserted, the present rental-value of the leased

premises for the remainder of the term was $33,000. The lessor ::

filed its claim, one item being damages for loss of future. rentals,

which i asked to have liquidated at $25,000, the difference be-

tween the rent‘ reserved and the present rental value.

pee Re Ne ee NS

2. Manhattan Properties, Inc. vs. Irving Trust Co.

~The lease contained a covenant that if the tenant should default

in the payment: of rent, or abandon the premises, or if they should

become vacant, the tenant become insolvent, or make an assign-

ment for the benefit of creditors, or if bankruptey proceedings

Should -be instituted by or against the tenant, the landlord might.

without notice reenter the premises; and after obtaining posses-

sion, relet as agent for the tenant, for the whole or any part of the

term, and from time to time, and: ?

‘“The Tenant further agrees to pay each month to the Land-

lord the deficit accruing from the ‘diffarenge between the amount —

to be paid as rent as herein reserved and the amount of rent which

shall be collected and received from the demised premises for such

month during the residue of the term herein provided for after the

. taking possession by the Landlord; the overplus, if any, at the ex-

piration of the full term herein provided for shall be paid to the

Tenant unless the Landlord within a period of six months from the

termination of this lease as’ provided herein shall, by a notice in

writing, release the Tenant from any and all liability created by

this provision of the lease, which it- is agreed the Landlord shall,

at the Landlord’s option, have the right to do, in which event it

is agreed that the Landlord and the Tenant shall have no further

‘rights and liabilities hereunder.”’

. The referee expunged so much of the claim as sought damages

for loss of future rents, holding that it did not constitute a prov-

able debt. The District Court and the ‘Cireuit Court of Appeals

were of the same opinion.

In No. 506 premises. owned by the petitioners were held by the

bankrupt under a lease dated June 14, 1920, for a term to expire

June 30, 1945. There was a covenant that on default by the lessee,

or if it should be adjudicated a bankrupt, the lessor might enter

and repossess the premises,

sé

and upon entry as aforesaid this lease shall deter-

mine, and the Lessee covenants that in ease of such termination

it will indemnify the Lessor against all loss of rent which the

Lessor may incur by reason of such termination, during the residue

of the term above specified.’?

. A voluntary petition was filed and an adjudication entered

August 29, 1932. November 23, 1932, the trustee disaffirmed the

lease, and three days later the lessors took possession and _ pro-

ceeded to collect rents from the occupants of the demised premises;

166 F. (2d), 470,

awe

Manhattan Properties, Inc. vs. Irving Trust Co. 3

and January 13, 1933, they filed a proof of claim which as amended

included an item of $4404.40, representing the difference between

the rent accrued to the date of reentry and the collections from

occupants during that period, and an item of $143,615.80, repre-

senting the difference between, the alleged rental value for the re-

‘mainder of the term after reentry and the rent reserved in the

lease. Petitioners made application for liquidation of ‘their claim

under See. 63 (b) of the Bankruptey Act. The trustee moved to

have the claim expunged and disallowed. The referee disallowed

both items, and his action was affirmed by the District Court and

the Cireuit Court of Appeals.2: ‘<

The controversy hinges upon the interpretation of the following

'. sections of the Bankruptey Act:

**See. 63. Debts which may be proved. (a) Debts of the bank-

rupt may be proved and allowed against his estate which are (1)

a fixed liability, as evidenced by a judgment or an instrument

in writing, absolutely owing at the time of the filing of the peti-

tion against him, whether: then payable or not, with any interest

thereon which would have been recoverable at that date or with

. _ @ rebate of interest upon such as were not then payable and did

not bear interest; . | . (4) founded upon an open account,

. Or upon a contract express or implied; . , °

. ““(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,’"> ~

“Section 1 (11). ‘Debt’ shall include any debt, demand, or claim

provable in bankruptcy.’’! .

‘Section 17. A discharge in bankruptcy shall release a bank-

rupt from all of his provable debts,’”” . . 55

A majority of the Cireuit Court of Appeals felt bound to follow

its earlier decision In re Roth & Appel, 181 Fed. 667, which denied:

a landlord’s right to prove a claim for future rents arising under

a similar lease. The view there expressed was that the occupation

of the land is the consideration -for the rent, and if the right to

occupy terminates, the obligation to pay ceases; and the covenant

to pay rent-creates no debt until the time stipulated for payment

266 F. (2d) 473, .

'3U. S. C. Title 11, § 103,

*4U. S.C. Title 11, §1.

8U. S. C. Title 11, § 35.

4 Manhattan Properties, Inc. vs. Irving Trust Co-

arrives. Since many events may occur which will absolve the

tenant from further obligation for rent, the claim is said to be

too contingent, both because of the uncertainty at the date of ad--

judication that the lessor will reenter, and the doubt as to his

suffering loss of rent if he should reenter.

In the present case, one of the judges of the Court of Appeals

held that Maynard v. Elliott, 283 U. 8S. 273, has settled the prov-

ability of claims ¢ontingent in‘ the sense that no, sunf is presently

payable, thus destroying the principal ground of decision in re

Roth & Appel, and that the estimation of the present worth of

payments to be made in the future is no obstacle to the proof of

- a claim based upon an anticipatory breach. Central Trust Co. v.

Chicago Auditorium Association, 240 'U. S. 581. .

The petitioners say the provability of claims for future rent is a

subject on which the lower federal courts, have been in disagree-

ment. They argue that a claim for rent is founded upon a lease

which is an express contract within the words of Section 63 (a) (4). .

They rely upon the purpose of the bankruptcy law to bring in all

contract creditors and to discharge all debts of the bankrupt, so

that he may start afresh unembarrassed by old indebtedness, and

point to the hardship to an individual bankrupt of not discharging

claims for rent which might well prevent his financial rehabilita-

tion, and the unfairness to the landlord of a corporate bankrupt

who, under the decision below, cannot prove upon his lease along

with other creditors, but must look solely for redress for loss of

' future rents to a eorporate debtor whom bankruptcy has stripped

of all assets. —

The respondent asserts a substantial difference between rent and

other kinds of indebtedness, and presents equitable considerations

thought to weigh in its favor, but especially stresses the legisla-

tive history of the bankruptcy laws passed by Congress, and in-

sists that the preponderant construction of them by the courts ex-

cludes claims for future rents from the class of provable debts.

The issue is not one of power, for plainly Congress may per-

mit such claims‘or exclude them. The sole inquiry is the intent

of the Act. The construction for which the petitioners contend is,

as a matter of logic, an admissible one. But that construction is

contrary to the great weight of authority as to the effect of -simi-

lar provisions in earlier Acts; arid Section 63 of the present Act.

-Manhattan Properties, Inc. vs. Irving Trust Co. 5

In England such claims were not provable under the Act: of 7

Geo. I, e. 31; Mayor v. Steward, 4 Burr. 2439; and a discharge

could not be pleaded in defense of an action for rent accruing sub-

‘ sequent to bankruptcy. Boot v. Wilson, 8 East, 311, The land-

lord’s claim for loss of future rent was made provable by the Act

of 32 and 33 Vict., c. 71, See. 23 (1869), and more explicit provi-

sions to the same effect were embodied in that of 46 and 47 Vict.,

Ch. 52, Sees. 37 and 55 (1883). a

The Act of Congress, approved April 4, 1800,° permitted proof

of a limited class of contingent claims, but did not mention rents.

Apparently the latter were not considered provable debts under

___ that statute. Hendricks v. Judah, 2 Caines (N.Y.) 25; Loni,

fk Prendergast, 9 Johns. (N. Y.) 127.

The Act of August 19, 1841, See. 5, 5 Stat. 440, 444, expressly

allowed proof of contingent claims,’ specifying certain classes

and adding a general description of contingent debts, but said

nothing about rept. The courts held that the latter was not a

provable debt within this section, because neither a present debt

nor a contingent claim susceptible of liquidation. Bosler vy. Kuhn,

8 Watts & S. (Pa.) 183; Stinemets v. Ainslie, 4 Denio (N. Y.)

573; Savory.v. Stocking, 4 Cush. (Mass.) 607.

The Act of March 2, 1867, Sec. 19, 14 Stat. 517, 525, authorized

the proof and liquidation of contingent claims, and also proof of a

claim for a proportionate part of any rent up to the date of bank-

ruptey.* The courts uniformly held that claims for future rent

6 2 Stat. 19, See. 39. “* , . . the obligee of any bottomry or respondentia

bond, and the assured ‘in any policy of insurance, shall be admitted to claim,

and after the contingency or loss, to prove the debt thereon, in like manner as

if the same had happened before issuing the commission; and the bankrupt

shall be discharged from such securities, as if such money had been due and

a payable before the time of his or her becoming bankrupt’”...

**7 . . . all creditors whose debts are not due and payable until a future”

day, all annuitants, holders of bottomry and ‘respdndentia bonds, holders of

policies of insurances, sureties, indorsers, bail, or other persons, having un-

certain or contingent demands against. such bankrupt, shall be permitted to

come in and prove such debts or claims under this act, and shall have a right,

when their debts and clainis become absolute, to have the same allowed them ;.

and such annujtants and holders of debts payable in future ‘may have the

present value thereof ascertained, under the direction of such court, and ~

‘yallowed them accordingly, as debts in presenti .. .’’ 7 ;

s*¢ . ..In all eases of contingent debts and contingent liabilities: con-

tracted by the bankrupt, and not herein otherwise provided for, the creditor —

6 Manhattan Properties, Inc. vs. Irving Trust Co.

or for damages for breach of covenant to pay rent were not prov-

able under the act, though differing as to the reason ; some holding

them not cohtingent claims within the Statutory definition, and

others thinking the expréss permission of proof for rent past due

at the date of bankruptcy impliedly excluded claims for rents

thereafter ‘falling due. Ex parte Houghton, Fed. Cas. 6725; Ex

parte Lake, Fed. Cas. 7991; In re Croney, Fed. Cas. 3411; In re

Commercial Bulletin Co., Fed. Cas. 3060; In re May, Fed. Cas.

‘9325; In re Hufnagel, Fed. Cas. 6837; Bailey v. ; ie Fed. Cas. °

739. '

In the rear 1880 Breuit Judge John Lowell, of Massachusetts.

at the suggestion of several mercantile associations, - drafted

a proposed bankruptey law, which, after revision, was introduced

in Congress, but failed of passage. It contained a section (60)

which allowed proof of damages suffered by a landlord by reason

of the trustee’s rejection of a lease, and another (61) permitting

any creditor to compel the trustee to elect to accept or decline any

lease, and upon declination the landlord was to have ‘‘any damages

he shall suffer thereby assessed, as the court shall direct, and prove

the amount as a debt in the bankruptey.’” °

After much agitation by trade anseclatios Yund~CScmmerciel

bodies, and after prolonged consideration. (see Schall ‘v. Camors,

251 U. S. 239, 250), Congress adopted the Act now in force, that

of July 1, 1898..° The committee reports do not disclose the origin

of the phraseology of Section 63, nor discuss the classes of claims

intended to be included. But, it is clear that Congress was familiar

with analogous sections of the earlier Acts and the court, deci-

sions interpreting them, and with the text of the Lowell Bill and

may make claign therefor, and have his claim allowed, with the right to share

in the dividers, if* the contingency shall happen before the order for the

final dividend; or he may at any: time apply to the court to have the present

value of the debt or liability ascertained and liquidated, which shall then be

done in such manner as the court shall order,’and he shall be aHowed to

prove for the amount so ascertained. oe ;

‘*Where the bankrupt is liable to pay rent or other debt f&lling 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. ’*

®*The bill in full appears in the Congressional Record, Vol. 14, pp. 43-48.

1030 Stat. 544, ¢. 541.

\

'

Manhattan Properties, Inc. vs. Irving Trust Co. « 7

the English act then in force. In view of the extended considera-

tion and discussion which preceded the passage of the Act, the fail-

ure to include a provision for claims for loss of rent or for dam-

ages consequent on the abrogation of: leases, is significant of an

intent not to depart from the precedents disallowing them. Schall

‘v. Camors, supra, pp. 250, 251. .

Soon after the passage of the Act several federal courts were

called upon to decide the question, and they uniformly held such

claims were not provable debts under Section 63. In re Elis, 98

Fed. 967; In re Mahler, 105 Fed. 428; Atkins v. Wilcoz, 105 Fed.

595. Since 1900 the Cireuit Courts of Appeals in six circuits, and

Mo the District Courts in another, have agreed with these early ad-

judications. Slocwm v. Soliday, 183 Fed. 410; McDonnell v. Woods,

298 Fed. 434.(C. C. A. 1); In re Roth & Appel, supra; In re Mull-

ings Clothing Co., 238 Fed. 58; In re Metropolitan Chain Stores

Inc., 66 F. (2d) 482 (C. C. A. 2); Trust Co. of Georgia v. White-

hall Holding Co., 53 F. (2d) 635; Orr vy. Neilly, 67 F. (2d) 423

(C. C. A. 5); Wells vy. Twenty-first Street Realty Co., 12 F. (2d)

‘237 (C. C. A. 6); Britton v. Western Iowa Co., 9 F. (2d) 488

(C: C. A. 8) ; Colman Co. v. Withoft, 195 Fed. 250 (C. C. A. 9);

a Bray v. Cobb, 100 Fed. 270; In re Hook, 25 F. (2d) 498." The de-

cisions in. the Third Cireuit turn upon a special form of lease

drawn to take advantage of a local Statutory provision, and while |

‘establishing a rule differing from that elsewhere , recognized, are

not inconsistent with it. See Wilson v. Pennsylvania Trust Co.,

114 Fed. 742; South Side Trust Co. v. Watson; 200 Fed. 50; In re_

H. M. Lasker Co., 251 Fed. 53: Rosenblum v. Uber, 256 Fed. 584.

The Court of Appeals of the Seventh Circuit has not disgassed

. the question at length, but at least one of its decisions supports the

view that a claim for loss of future rentals may be proved. In re

Chakos,°24 F. (2d) 482; compare Jn re Desnoyers Shoe Co., 227 .

Fed. 401; In re National Credit Clothing Co., 66 F. (2d) 371.

This court has never had occasion to pass upon the precise

point. It has naf, however, expressed disapproval of the rulings

of the great majority of the lower federal courts, .and cited

many of their decisions with apparent approbation. Seg Central

Trust Co. v. Chicago Auditorium Association, 240 U. S. §81, 589-

> 590; Wm. Filene’s Sons Co. v. Weed, 245 U. S. 597; @ardiner v.

_ Butler & Co., 245 U. 8. 603; 605; Maynard v. Elliott, 283 U. S. 273,

278.

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ae Manhattan Properties, Inc. vs. Irving Trust Co.

In accord with the well-nigh unanimous view of the federal

‘ courts reiterated for over thirty years are statements of leadingg

text’ writers. Collier, Bankruptcy, Vol. 2, p. 1422; Remington,

_Bankruptcy, Vol. 2, §§ 789, 793 ; Loveland, Bankruptcy, Vol. _ e

§313. we

What of the | activities of the neta while this body of deci-

sions interpreting’ Section fa was growing? From 1898 to 1932

the Bankruptey Act was “amended eight times" without alteration

of the section.. This is persuasive thatthe construction adopted by

the courts has been acceptable to the legislative. arm of the govern-

ment, B. & O. Ratlroad Co. v. Baugh, 149 U. 8. 368, 372. |

In this situation ‘ ‘only compelling oe . the statute itself

would warrant. the ‘rejection of a construction so long aml*so gen-

erally accepted.’ Maynard v. Elliott, supra, 277. If the-rulé is

_to be changed Congress should so declare.

The petitioners call attention to the last clause of Section 74 (a), ‘\

which is one of the sections added to the Act in 1033:'? ‘“A claim —

for future rent shall constitute a provable debt and shall be liqui-

dated under section 63 (b) of this Act.’’ Sections 73 t6 76 inclu-

sive were enacted to permit extensions and compositions not there-

tofore possible. They apply only to individuals. It is highly un-

likely ‘that if the quoted sentence had been intended as ax’ amend- ;

ment of Section 63 (a) it would have been placed in coytext deal-

ing only with the novel procedure authorized by the n sections.

Moreover, the discussion on the floor of the Senate relative to the

insertion of the sentence, indicates that it was not intended_ to alter

Section 63 (a) as it thel stood.'* The petitioners insist the clause

‘is declaratory of the law, as understood by the Congress; buit there .

is no evidence to support this view, and it is inconsistent with the

long standing contrary judicial construction.

It remains to considep the effect of the indemnity covenants ine

the leases. These do not provide for liquidation of daf@ages (com- . sg

pare Wm. Filene’s Sons Co. v. Weed, supra), nor indeed for any

right to damages for breach of the covenant to pay rent.

11Acts of February 5, 1903, c. 87, 32 Stat. 797; June 15, 1906, c. 3333,

34 Stat. 267; June.25, 1910, c. 412, 36 Stat. 838; March 2, 1917, c. 153,

. 39 Stat. 999; January 7, 1922, ec. 22, 42 Stat. 354; May 27, 1926, ¢. 406, °

44 Stat: 662; February 11, 1932, @ 38, 47 Stat. 47.

12Act of March 3, 1933, 47 Stat. 1467.

13Cong. Rec., Senate, Feb. 24, — pp. 5058-9; Feb. 27, 1933, p. 5278.

Manhattan Properties, Inc. vs. Irving Trust Co. 9

In No. 505 the agreement is, in the event of reentry and re-

letting by the landlord, to pay each month the deficit accruing

from the difference between the amount to be paid as rent under

the lease and, the amount received by the landlord from the prem-

_ises throughout.the residue of the original term; and further, that

the overplus, if any, at the expiration of the term, shall be paid to

the tenant, unless the landlord, within six months from reentry,

release the tenaxt from all liability under the covenant, which the

‘landlord is authorized to do, th rminating _all "rights and lia-

bilities under the agreement of lease.

In No. 506 the ‘stipulation is that upon bankruptcy the land-

lord may reenter and thereby terminate the lease, and the lessee

covenants that, in such ease, ‘‘it will indemnify the Lessor against

all loss of rent which the Lessor may incur by reason of such

: termination, during the residue of the term’’

In both cases the lessor has the choice whether ‘he will termi-

nate the lease. Neither the bankrupt not the trustee has any such

option, except as the trustee may be entitled by law to disclaim.

And upon the-exercise of the option by the landlord, a new con-

tract, distinct from that involved in the original letting, becomes

operative. While thereYs some color for the claim that bankruptcy

is-an anticipatory breach of the lease contract, entailing a damage

claim against the estate, this cannot be trué as respécts these inde-

pendent covenants of-indemnity. For here, the landlord does not

rely upon the destruction of his contract: by the bankruptcy; he

initiates a new contract of indemnity by the affirmative step of

reentry. And this new contract comes into being not by virtue of

the bankruptcy proceeding, but -by force of the act of reentry,

which must occur at a date subsequent to the filing of the petition.

Obviously this contract of indemnity is not breached by bank-

ruptey, and cannot be breached until the duty of indemnifying

the landlord arises. That obligation cannot be complete until the

_ expir@fion of the original term. ‘There can be no debt provable in

bankruptcy arising out of a contract which becomes effective only

at the claimant’s option and after the inception of the proceed-

ings, the fulfilment of which is contingent on: what may happen

_ from month to month or up to the end ofthe original term. Com-

pare In re Ells; supra; Slocum v. Soliday, supra; In re Roth & ©

Appel, supra. ‘Such a covenant is not, as petitioners contend, the

‘10. . Manhattan Properties, Inc. vs. Irving Trust Co.

equivalent of an agreement that bankruptcy shall be a breach of

the lease and the consequent damages to the lessor be measured by

the difference between the present value of ae of the’

ad

‘term and the total rent to fall due in, the future! e covenants .

appearing in the leases in question cannot be m e basis of a

’ . proof of: debt against the estate.

-The judgments are

ak _ Affirmed.

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