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In re F. & W. Grand 5-10-25 Cent Stores Inc.

January 7, 1935

IN RE F. & W. GRAND 5-10-25 CENT STORES, INC.; URBAN PROPERTIES CO.
v.
IRVING TRUST CO.



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

Author: Hand

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

L. HAND, Circuit Judge.

The claimant appeals from an order of the District Judge affirming the order of a referee, expunging its claim for rent falling due after petition filed. The facts are as follows: In November, 1929, the claimant leased to the bankrupt a parcel of land in California, on which before August 1, 1932, it was to build a suitable store; if it did, the bankrupt on that day would enter for a term of twenty-five years, paying rent. The lessor reserved power to re-enter for failure to pay rent, but the lessee did not promise in that event to pay the difference between the rent reserved and the value for the residue of the term. The bankrupt fell on evil times and receivers were appointed for it on March 19, 1932, in the Southern district of New York, upon the customary sequestration bill; ancillary receivers following in California, who disaffirmed the lease. Thereafter on July 14, 1932, the lessee was adjudged bankrupt, and the question is whether a claim for future rent is good. The referee and the judge thought not, and the claimant appealed. It argues that there is a difference between this situation and that of a lease in which the lessee has taken possession and then goes bankrupt without any preliminary receivership, in which event it conceded, as indeed it must, that Manhattan Properties v. Irving Trust Co. 291 U.S. 320, 54 S. Ct. 385, 78 L. Ed. 824, would rule. Rather it says that, the breach being both before entry and before petition filed, the cause of action is fixed and the damages calculable. The are the sum of the future rents -- discounted, we assume, to the date of the breach -- less the then value of the term. This being a sum readily ascertainable, the claim is provable under § 63b, Bankr. Act (11 USCA § 103(b). They rely upon our decision in Re Mullings Clothing Co., 238 F. 58, and that of the Seventh circuit in Lloyd Investment Co. v. Schmidt, 66 F.2d 371, which followed it.

Since Central Trust Co. v. Chicago Auditorium Ass'n, 240 U.S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L.R.A. 1917B, 580, the bankruptcy of a debtor has been regarded as an anticipatory breach, resulting in a provable claim, on the theory that it comes into existence at the very instant of bankruptcy. Maynard v. Elliott, 283 U.S. 273, 51 S. Ct. 390, 75 L. Ed. 1028, carried this further by holding that contingent claims might be proved, if not too contingent either in amount or in obligation. That would have paved the way for proof of claims for any future rent, or for the breach of a covenant to pay the difference between the future rents and the present value of the terms. The ratio decidendi of In re Roth & Appel, 181 F. 667, 31 L.R.A. (N.S.) 270 (C.C.A. 2), was discredited and the decision might have fallen too. But the Supreme Court in Manhattan Properties v. Irving Trust Co. 291 U.S. 320, 54 S. Ct. 385, 78 L. Ed. 824, said no; they thought that the long course of bankruptcy legislation showed that rents were meant to stand apart, and were not provable even under statutes which allowed contingent claims generally. That doctrine does indeed have limits (Irving Trust Co. v. A. W. Perry, Inc., 293 U.S. 307, 55 S. Ct. 150, 79 L. Ed. ), but we are to take it that rents which are conditional upon the endurance of the term are not provable, because they may never become payable; the lessor may re-enter.

In Re Mullings Clothing Co., 238 F. 58, we held a claim provable in bankruptcy in circumstances substantially like those at bar. The bankrupt lessee had not entered under the new lease, though it was in under an existing lease. Its directors -- it was a company -- voted to dissolve it and had a receiver appointed in dissolution who disaffirmed the lease before entry or petition filed. We cannot distinguish the two situations and this order must be reversed or that decision overruled. Although it was decided some six months after Central Trust Co. v. Chicago Auditorium Ass'n, supra, 240 U.S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L.R.A. 1917B, 580, the opinion did not mention that decision and the court was apparently unaware of it. True, it did discuss generally the doctrine of anticipatory breach, but without specific reference to a petition in bankruptcy; being concerned only with the appointment of the receiver on dissolution. It distinguished In re Roth & Appel, supra, 181 F. 667, 31 L.R.A. (N.S.) 270, because section 63b, 11 USCA § 103 (b), did not cover contingent claims, which we now know to be untrue; but aside from that it is really impossible to see what uncertainties infested the claim in Re Roth & Appel that were absent in Re Mullings Clothing Co. The fact that there was an existing cause of action makes no difference, once one admits that bankruptcy creates an anticipatory breach on which a provable claim may be filed. It can be of no consequence how wide the span is between breach and bankruptcy, whether ten days or more, or a merely imaginary duration. Rent claims of all sorts are refused recognition merely because they are rent claims, and there is no more to be said about it, except that if wholly free from all uncertainty they are sometimes provable.

Nor is it important that the lessee may not have entered at petition filed. It is true that in that case he also breaks the implied promise to enter, but no damages flow from that; damages arise only from the failure to pay the rent as it falls due, and, while the accident law did indeed recognize a difference between rent and a promise to pay rent, it is a barren distinction now. But a lesses promises once for all to pay the future rents when he signs the lease; and he commits an anticipatory breach of that promise when a receiver is appointed or bankruptcy occurs, whether or not he has entered. The difficulty in neither case is that a cause of action has not accrued, but that the amount of the recovery is uncertain; and that uncertainty is as great when the leasee has not entered, as when he has; perhaps more. Nobody can tell in either case how long the term would have lasted or how many installments would ever have become due. True, that uncertainty is no greater than the law has met and answered in other situations, but the doctrine is based in history, not logic.

We have three times before indicated that In re Mullings Clothing Co., supra, 238 F. 58, had become of doubtful authority. Jones Co. v. Winchester Repeating Arms Co. (C.C.A.) 61 F.2d 774, 776; Malavazos v. Irving Trust Co. (C.C.A.) 66 F.2d 483, 484; Possart v. Irving Trust Co. (C.C.A.) 69 F.2d 807, 808. In the last of these we said that we did not see how it could survive Manhattan Properties v. Irving Trust Co., supra, 291 U.S. 320, 54 S. Ct. 385, 78 L. Ed. 824; but we have never before been faced with the choice of following or overruling it. Although Lloyd Investment Co. v. Schmidt, supra, 66 F.2d 371, followed it, that was before Manhattan Properties v. Irving Trust Company. Perhaps the Supreme Court will feel obligated to consider the difference of opinion between ourselves at present and the Seventh circuit, but until it decides otherwise we definitively overrule In re Mullings Clothing Co.

Order affirmed.

MANTON, Circuit Judge (dissenting).

November 9, 1929, appellant, as lessor, and the bankrupt, as lessee, entered into an agreement to lease certain premises in Los Angeles, Cal., for twenty-five years from August 1, 1932, or from the date of the completion of a new building, which the appellant agreed to construct for the use of the bankrupt. The rent was on a rising scale to be paid in monthly installments. Before the term of the lease commenced and before the building was constructed, in March, 1932, receivers in equity were appointed for the bankrupt with ancillary receivers in California, and, on May 21, 1932, prior to the commencement of the term of the lease and the construction of the building, the ancillary receivers in California disaffirmed the lease, advising the appellant accordingly. This was a breach before the term commenced and before there was any privity of estate between the appellant and the bankrupt. Bankruptcy followed July 14, 1932. The reasonable rental value of the property with the proposed building thereon was fixed at $102,500, whereas the rent reserved in the lease for the entire term was $215,000. The appellant made claim for the difference, $112,500. This appeal is from an order disallowing the claim.

In Central Trust Co. v. Chicago Auditorium Ass'n, 240 U.S. 581, 36 S. Ct. 412, 415, 60 L. Ed. 811, L.R.A. 1917B, 580, the court held that bankruptcy may constitute an anticipatory breach of an executory agreement, and the court made reference to In re Roth and Appel, 181 F. 667, 669, 31 L.R.A. (N.S.) 270 (C.C.A. 2), indicating that claims for future rents after a breach caused by bankruptcy, wouuld not be allowed against the bankrupt estate. This has long been considered an exception based upon Lord Coke's dictum as to the "diversity between duties which touch the realty, and the mere personalty." In the Chicago Auditorium Ass'n Case, supra, the court announced that "Proceedings, whether voluntary or involuntary, resulting in an adjudication of bankruptcy, are the equivalent of an anticipatory breach of an executory agreement." In Re Roth & Appel, supra, a petition in bankruptcy was filed prior to the time the term commenced, though adjudication was subsequent thereto. A claim by the lessor for the future rents was held not provable in bankruptcy. The reason given therefor was that "rent is a sum stipulated to be paid for the use and enjoyment of land. The occupation of the land is the consideration for the rent. If the right to occupy terminate, the obligation to pay ceases. Consequently, a covenant to pay rent creates no debt until the time stipulated for the payment arrives. The lessee may be evicted by title paramount or by acts of the lessor. The destruction or disrepair of the premises may, according to certain statutory provisions, justify the lessee in abandoning them. The lessee may quit the premises with the lessor's consent. The lessee may assign his term with the approval of the lessor, so as to relieve himself from further obligation upon the lease. In all these cases the lessee is discharged from his covenant to pay rent. The time for payment never arrives. The rent never becomes due."

At that time, this court was of the opinion that section 63a(1) of the Bankruptcy Act, 11 USCA § 103(a)(1), must be read with section 63a(4), 11 USCA § 103(a)(4), so that, even though a claim was founded on a contract, it could not be proved if it were not a "fixed liability * * * absolutely owing at the time of the filing of the petition." But this was overruled in Maynard v. Elliott, 283 U.S. 273, 51 S. Ct. 390, 75 L. Ed. 1028, where it was held sufficient if the claim could be included within section 63a(4). But the Maynard Case did not withdraw the approval previously given to the holding as to future rents as decided in Re Roth & Appel, supra. Manhattan Properties v. Irving Trust Co., 291 U.S. 320, 54 S. Ct. 385, 78 L. Ed. 824.

But nowhere does it appear that the Supreme Court has ruled that claims otherwise arising from leases, as such, were nonprovable in bankruptcy, and the contrary is to be inferred from Irving Trust Co. v. A. W. Perry (In re Outfitters Operating Realty Co.), 293 U.S. 307, 55 S. Ct. 150, 79 L. Ed. . In Re Mullings Clothing Co., 238 F. 58 (C.C.A. 2), expressly overruled by the prevailing opinion, this court properly limited its prior decision in Re Roth & Appel, supra. There, as in the instant case, there was a repudiation of the lease prior both to the bankruptcy and to the time the term of the lease was to begin. There, as here, it was not necessary to find the bankruptcy of the lessee an anticipatory breach of the lease since there had been a repudiation prior to bankruptcy. There the court followed Roehm v. Horst, 178 U.S. 1, 20 S. Ct. 780, 44 L. Ed. 953, which held that, where a contract is renounced before performance is due, and the renunciation is in unequivocal terms, the injured party may bring his action at once for the complete breach. Therefore it appears that a ...


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