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In re Metropolitan Chain Stores Inc.

July 17, 1933


Appeals from the District Court of the United States for the Southern District of New York.

Author: Manton

Before MANTON, L. HAND, and SWAN, Circuit Judges.

MANTON, Circuit Judge.

The appellants owned parcels of realty, leased to the bankrupt, and present claims in an amount sufficient to restore the premises altered by the bankrupt, as lessee, upon the expiration of the lease by bankruptcy. The leases are identical in terms. That held by the First National Bank of Canton provides that the lessee could alter the premises, and that at the termination of the lease or any expiration or renewal thereof the lessee would restore the premises to their former condition unless directed not to do so by the lessor. Article XIII of the lease provides that the lessor could re-enter on ten days' notice if the conditions were breached, or could recover damages for a breach by the lessee without forfeiture of the lease, and provides that the lease "shall become null and void and be at an end at the election of the Lessor" in the event of bankruptcy and "in the event that on demand in writing by Lessor" the trustee does not pay the rent due within 24 hours.

The appellee asserts that appellants' claims do not sufficiently show an exercise of the option to terminate the lease. In Central Trust Co. v. Auditorium, 240 U.S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L.R.A. 1917B, 580, it was held that bankruptcy was an anticipatory breach of an executory contract giving rise to a provable claim. It distinguished a number of cases arising out of the relation of landlord and tenant where it was held that future rents and other obligations of the lessee were not provable against a bankrupt estate. The cases disclose that some obligations of the lessee found in a lease, unlike rents unaccrued when the petition is filed, are provable. In re Marshall's Garage, 63 F.2d 759 (C.C.A. 2); Trust Co. of Ga. v. Whitehall Holding Co., 53 F.2d 635 (C.C.A. 5); In re Desnoyers Shoe Co., 227 F. 401 (C.C.A. 7); In re Barton (D.C.) 34 F.2d 517. In each case it must be determined whether the claim is so contingent and speculative as to make it uncertain whether liability would ever attach. As pointed out in the case of In re Roth & Appel (C.C.A.) 181 F. 667, 31 L.R.A. (N.S.) 270 (C.C.A. 2), the claim for future rent is fatally contingent. And in the case of In re Jorolemon-Oliver Co., 213 F. 625 (C.C.A. 2), this court applied the same rule as the Roth Case and held that certain claims under a lease of machinery were not provable because the lease was terminated, not by bankruptcy, but by the option of the landlord who "served notice upon the trustee in bankruptcy terminating the leases." The claims there disallowed were not for future rents, but for repairs, freight, and return charges on the leased chattels. In the case of In re Desnoyers Shoe Co., 227 F. 401 (C.C.A. 7), the court, Mack, J., allowed claims similar to those rejected in the Jorolemon Case, supra. The court said that in the Jorolemon Case the lease was terminated by the notice after petition filed, but that under the contract before it the lease was terminated upon bankruptcy at the option of the lessor manifested after bankruptcy, and therefore the claim was fixed and absolute at the time of bankruptcy. In the instant case, the lease provided that it would become null and void at the election of the lessor in the event of bankruptcy and in the event that on demand in writing the trustee did not pay the arrears of rent and rent for the term of his occupancy. Even if it be assumed that the lessor exercised the election as provided in the lease, its contingency on the failure of the trustee to pay rent demanded by the lessor prevents the claim from being considered as fixed and absolute when the petition is filed. The claim would become certain only upon the trustee's refusal to pay back rent. This refusal would be after bankruptcy necessarily, but the right to file a claim should not turn upon the interpretation of the words of the option provision of the lease as providing for termination coincident with or subsequent to bankruptcy. That is exemplified in the Desnoyers decision, supra. If the election is seasonably asserted, coincident with or subsequent to the petition in bankruptcy, our decision should turn upon the contingency or absolute character of the claim asserted as of the time of the petition in bankruptcy. It should rest upon the character of the claim; that is, the promise to restore the premises as at the time of bankruptcy, even though the option be considered as exercised upon the trustee's refusal to pay rent after bankruptcy. Covenants in leases to restore property pending termination or expiration have been held the basis of claims provable in bankruptcy on the theory that these covenants were separable from promises to pay future rents and were fixed and absolute. Trust Co. of Ga. v. Whitehall Holding Co., 53 F.2d 635 (C.C.A. 5); In re Barton (D.C.) 34 F.2d 517.

In McDonnell v. Woods, 298 F. 434 (C.C.A. 1), the claim for cost of restoration of the premises was disallowed on an interpretation of the contract that the right arose only on re-entry. It was after bankruptcy. But in Re Barton, 34 F.2d 517 (D.C.D.N.H.), the right to restore arose on the termination of the lease by means other than reentry after bankruptcy. The lease was terminated by notice given the day before bankruptcy. By statute such notice to quit "at the end of seven days" was equivalent to reentry. While it is true that, at the time, the claim may not be said to have been fixed when the petition was filed, still the time of bankruptcy marked the date when the obligation was absolute to make the alterations required by the tenant under the contract. The claim for restoration of property should be allowed on the more liberal theory expressed in Maynard v. Elliott, 283 U.S. 273, 51 S. Ct. 390, 75 L. Ed. 1028. The claim is unlike unaccrued rents, and the very technical and undesirable rule of having the question turn on whether the claim accrued on the day when the petition was filed or a few days later should be avoided. In re Marshall's Garage, 63 F.2d 759 (C.C.A. 2).

The decree is reversed.

L. HAND, Circuit Judge, concurring with opinion.

SWAN, Circuit Judge, dissenting with opinion.

L. HAND, Circuit Judge (concurring).

In Manhattan Properties, Inc., v. Irving Trust Co. (C.C.A.) 66 F.2d 470, handed down herewith, I have said what I thought about the question which underlies this appeal, and that case was stronger for the trustee than this. I accept it as a fact, though the record does not show it, that the trustee did not assume the lease; if so, the bankrupt continued as tenant, for the term did not end. But the lessee was subject to re-entry for breaches of condition, one of which was a failure to pay rent, though the lease contained no covenant reserving damages to the lessor in that event, either by way of liquidated damages, or actual damages seriatim as the installments fell due. I assume therefore that no future rent was recoverable, the probabilities all being that the lessee would reenter and rent end with the term. However, we have not that question before us, but whether the covenant to restore the premises, anticipatorily broken by the bankruptcy, may be the basis of a provable claim.

Upon petition filed such a claim was contingent both in obligation and in amount. The lessor might be evicted by paramount title, or the premises might be destroyed; in either case the lessee was relieved. The trustee might assume it and pay the back rent. Again, no one could say when the lessor would re-enter, or theoretically whether he would re-enter at all; and the cost of restoration would depend upon when he did; in any event the time during which the payment should be discounted was as yet uncertain.But if, as I think, contingency of the claim is not an absolute bar, for the reasons I have given in Manhattan Properties, Inc., v. Irving Trust Co., all these questions go into the realm of more or less. It may be when the claim is liquidated they will have been determined; probably they lessor has already re-entered and the time for performance of the covenant to restore is past due. If not, and if he has not re-entered before liquidation is complete, some approximation of the damages must be made, the objections to which do not seem to me practically insuperable. I had rather impose such hazards upon the creditors, so far as they are not acturarially possible of calculation, than to dismiss the lessor with nothing.

I acknowledge that such a claim may be too uncertain to be dealt with at all; a mere gamble to which the creditors are not obliged to submit, and I agree that it is impossible to say a priori how great the uncertainties must be to make it so. All that we need do here is to hold that they are too remote to make the claim bad in toto. The controlling point to my mind is that the contingency of the claim upon petition filed, either in obligation or amount, is no longer final; unless we are to make a difference between realty and ...

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