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In re United Cigar Stores Co.

November 30, 1936


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

Author: Hand

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is an appeal from an order in a proceeding under section 77B of the Bankruptcy Act (11 U.S.C.A. § 207) reducing the amount claimed as rent under a lease by the appellants to the above debtor, United Cigar Stores Company. The lease was for a term of 21 years from May 1, 1927, and covered buildings at Nos. 684, 686, and 688 Lexington avenue, New York City. It recited that the tenant was to pay specified monthly rentals and also "as additional rent, all taxes, assessments, water rents, ordinary and extraordinary and other charges on said property as and when hereinafter specified."

The lease provided that the tenant pay "when due all duties, taxes, assessments, water rates, water charges and other charges, extraordinary as well as ordinary, and demands of whatsoever nature and kind as shall during said term be made, charged, assessed, imposed, levied, grow due or payable upon, against, out of, on account of, for or by reason of the said demised premises or any appurtenances thereof, * * *" exceptinheritance or income taxes which the landlord may be obliged to pay. It also provided that the tenant, at its own expense, should "keep in good order and repair, inside and outside, all buildings, structures, premises, sidewalks, and street gutters now or that may be hereafter erected or placed thereon or appurtenant or in front of said premises, and all equipment thereof, including but not being limited to all glass, skylights, engines, dynamos, boilers, elevators, machinery, pipes, plumbing, wiring, gas and steam and electrical fittings and every other fixture or thing during the term belonging to or used in connection with the leased premises; it shall from time to time when necessary make replacements of such equipment, at least equal to the original and sufficient for the same service, so that at all times, such buildings, structures, premises and equipment shall be in thorough good order, condition and repair."

The lease provided that the tenant should keep the leased property and equipment insured for the benefit of the landlord, and further (in paragraph "Twenty-second") provided that, if the tenant should fail to pay taxes, assessments, water rates, "or any other charge or payment required to be made and or paid * * * hereunder," the landlord might pay the same, and the tenant on or before the last day of the month during which such expense, expenditure, or payment should have been made or incurred by the landlord, and for which the tenant was responsible under the lease, should pay the landlord "as additional rent for said demised premises, in addition to all other sums of rent payable by virtue of these presents, a sum equal to the amount which shall have been so paid and or incurred by the Landlord in any and all of the cases hereinbefore in this paragraph referred to. * * *"

In paragraph "Twenty-third" the lease provided that, in case of "reentry or of the termination of the lease by summary proceedings or otherwise, whether the premises be relet or not, the Tenant shall remain liable until the time when this lease would have expired but for such termination thereof, for the yearly rent and additional rent reserved herein, less the avails of reletting. * * *"

August 29, 1932, the debtor was adjudicated a bankrupt on its voluntary petition. On September 26, 1932, an order was made authorizing the trustee in bankruptcy to assign to the landlords (the claimants herein) all the interest of the trustee in the lease and also in certain subleases which had been made by the bankrupt, without prejudice, however, to "any right of the landlord to declare the lease in full force and effect and to look to the bankrupt for full payment thereunder." The order recited that it was "intended to preserve every right that the landlord may now or hereafter have against the bankrupt except to release * * * the trustee * * * from liability under said lease."

No assignment of the main lease nor of the subleases was made, and on November 18, 1932, after refusal of the landlords to accept assignments, an order was made to be effective nunc pro tunc as of September 26, 1932, authorizing the trustee in bankruptcy to reject all interest in the lease by mailing a notice of rejection to the landlords, and on November 25 such a letter of rejection was duly mailed rejecting the lease as of September 26, 1932. On January 6, 1933, the landlords obtained an order in summary proceedings instituted in the Municipal Court of the City of New York, evicting the tenants under the subleases. Neither the trustee in bankruptcy, nor the bankrupt, had taken any steps either to cancel the subleases or to evict the subtenants, nor did the latter make any payment of rent to the landlords.

On June 9, 1934, the debtor filed its petition for reorganization pursuant to section 77B which was approved on June 14, 1934. In October, 1934, the landlords filed their proof of claim in which they sought to be allowed loss of rent at the rates reserved in the lease for three years from January 6, 1933, and also $10,916.17, the estimated cost of repairs and maintenance over the three-year period. The master allowed the three years' rent only from September 26, 1932, and, on the ground that no part of the $10,916.17 was "additional rent" within the meaning of the lease, declined to allow that item.

Claims for loss of rentals may be proved in a proceeding for reorganization under section 77B under the following provisions of subdivision (b) (10) thereof (11 U.S.C.A. § 207 (b) (10):

"In case an executory contract or unexpired lease of real estate shall be rejected pursuant to direction of the judge given in a proceeding instituted under this section, or shall have been rejected by a trustee or receiver in bankruptcy or receiver in equity, in a proceeding pending prior to the institution of a proceeding under this section any person injured by such rejection shall, for all purposes of this section and of the reorganization plan, its acceptance and confirmation, be deemed to be a creditor. The claim of a landlord for injury resulting from the rejection of an unexpired lease of real estate or for damages or indemnity under a covenant contained in such lease shall be treated as a claim ranking on a parity with debts which would be provable under section 63 (a) of this Act [section 103 (a) of this title], but shall be limited to an amount not to exceed the rent, without acceleration, reserved by said lease for the three years next succeeding the date of surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, whether before or after the filing of the petition, plus unpaid rent accrued up to such date of surrender or reentry."

The landlords object to the decision of the District Court on the ground: (1) That the statutory three-year period of limitation did not begin to run until January 6, 1933, when the landlords evicted the subtenants and obtained actual possession of the demised premises, whereas it was held to run from September 26, 1932; (2) that the estimated cost of repairs to and maintenance of the demised premises during the three-year period was by the terms of the lease a part of the "rent" and should accordingly have been allowed as such.

The solution to the first objection is to be found in the proper interpretation of the words in section 77B (b) (10) "for the three years next succeeding the date of surrender of the premises to the landlord or the date of reentry of the landlord, whichever ...

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