1. A stipulation in a contract to pay a fixed sum as liquidated
damages in case the contract be broken will not be enforced if the
amount fixed is plainly without reasonable relation to any probable
damages from a breach. P.
280 U.S.
226.
2. In a lease for two years, the lessee agreed that the mere
filing of a petition in bankruptcy against him should be deemed a
breach, and that thereupon,
ipso facto, the lease should
terminate and the lessor become entitled to reenter and also to
recover damages equal to the full amount of the rent reserved for
the remainder of the term. The lessee became bankrupt, and the
lessor claimed $5,000, equal to 15 months' rent.
Held,
that the claim should not be enforced against the trustee in
bankruptcy, as, on the case submitted, the provision in the lease
must be regarded as one for a penalty apparently designed to insure
to the lessor preferential treatment in the event of the lessee's
bankruptcy. P.
280 U.S.
226.
3. Agreements tending to defeat the purpose of the Bankruptcy
Act to bring about an equitable distribution of the bankrupt's
estate among creditors holding just demands based upon adequate
consideration must be regarded with disfavor. P.
280 U. S. 227.
30 F.2d 77 reversed
Certiorari, 279 U.S. 830, to review a judgment of the circuit
court of appeals reversing the district court and upholding a claim
against Kothe, as trustee in bankruptcy.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
April 20, 1927, respondent, the R. C. Taylor Trust, leased to
one Turkel certain real estate, reserving rent at the rate of
$4,000 per annum. The meager record before
Page 280 U. S. 225
us does not affirmatively show the length of the term, but we
accept the statement by counsel for both sides that it was two
years. The lease contained the following provision:
"The filing of any petition in bankruptcy . . . by or against
the lessee shall be deemed to constitute a breach of this lease,
and thereupon,
ipso facto and without entry or other
action by the lessor, this lease shall become and be terminated,
and, notwithstanding any other provisions of this lease, the lessor
shall forthwith upon such termination be entitled to recover
damages for such breach in an amount equal to the amount of the
rent reserved in this lease for the residue of the term
thereof."
Turkel having been adjudged bankrupt, the lessor filed proof of
debt for $5,000, demanded as
"damages for breach of lease, . . . that being the same as the
amount of rent reserved in the lease from February 15, 1928 to May
15, 1929, the end of the term."
The referee disallowed the claim
"for the reason that the proof is based on damages for the
amount of rent running from the date of the filing of the petition
to the end of the term of the lease, no part of such claim being
for any rent which had accrued at the time of the filing of said
bankruptcy petition."
The district court affirmed his action, but the court below held
the claim valid and allowable under ยง 63a(4) of the Bankruptcy Act
of 1898, 30 Stat. 563.
The trustee, petitioner here, maintains that the quoted
provision of the lease imposed a penalty, and did not express any
lawful purpose to fix the liquidated damages which might follow
failure to perform. On the other hand, the respondent insists that,
in view of the length of the term, the agreement must be regarded
as one for liquidated damages, and therefore unobjectionable.
Sun Printing & Publishing Assn. v. Moore,
183 U. S. 642, and
United States v. Bethlehem
Steel Co., 205 U.S.
Page 280 U. S. 226
105,
205 U. S. 119,
point out principles applicable to enforcement of contracts
providing for payment of definite sums upon failure to perform. The
courts are
"strongly inclined to allow parties to make their own contracts,
and to carry out their intentions, even when it would result in the
recovery of an amount stated as liquidated damages, upon proof of
the violation of the contract, and without proof of the damages
actually sustained. . . . The question always is 'what did the
parties intend by the language used?' When such intention is
ascertained, it is ordinarily the duty of the court to carry it
out."
And see United States v. United Engineering Co.,
234 U. S.
241:
"Such contracts for liquidated damages, when reasonable in their
character, are not to be regarded as penalties, and may be enforced
between the parties."
But agreements to pay fixed sums plainly without reasonable
relation to any probable damage which may follow a breach will not
be enforced. This circumstance tends to negative any notion that
the parties really meant to provide a measure of compensation --
"to treat the sum named as estimated and ascertained damages."
Here, we find the lessee in a lease for two years agreeing that
the mere filing of a petition in bankruptcy against him shall be
deemed a breach, and, thereupon,
ipso facto, it shall be
terminated and the lessor shall become entitled to reenter also to
recover damages equal to the full amount of the rent reserved for
the remainder of the term. The amount thus stipulated is so
disproportionate to any damage reasonably to be anticipated in the
circumstances disclosed that we must hold the provision is for an
unenforceable penalty. The parties were consciously undertaking to
contract for payment to be made out of the assets of a bankrupt
estate -- not for something which the lessee personally would be
required to discharge. He therefore had little, if any, immediate
concern with the amount of the claim to be presented; most
probably, that
Page 280 U. S. 227
would affect only those entitled to share in the proceeds of
property beyond his control.
The broad purpose of the Bankruptcy Act is to bring about an
equitable distribution of the bankrupt's estate among creditors
holding just demands based upon adequate consideration. Any
agreement which tends to defeat that beneficent design must be
regarded with disfavor. Considering the time which the lease here
involved had to run, nothing else appearing, it seems plain enough
that the real design of the challenged provision was to insure to
the lessor preferential treatment in the event of bankruptcy. The
record discloses no circumstance sufficient to support a contrary
view. If the term were much shorter, or there were facts tending to
disclose a proper purpose, the argument in favor of the lessor
would be more persuasive.
The decree of the court below must be reversed. The judgment of
the district court will be affirmed, and the cause remanded there
for further appropriate proceedings.
Reversed.