1. The claim of a landlord for future rents based on a covenant
to pay rent in a lease terminated by reentry on the bankruptcy of
the tenant is not a provable debt under § 63(a) of the Bankruptcy
Act. P.
291 U. S.
332.
So
held in view of the great weight of judicial
authority construing that section and similar provisions of earlier
Acts, and in view of the legislative history of the subject.
2. The fact that a provision of a statute which has received a
settled construction from federal courts has remained unaltered
notwithstanding that Congress has repeatedly amended the statute in
other respects is persuasive that the construction accords with the
legislative intention. P.
291 U. S.
336.
3. Sections 73-76, added to the Bankruptcy Act by the Act of
March 3, 1933, were enacted to permit extensions and compositions
not theretofore possible, for individuals only, and the clause of §
74(a) providing that "[a] claim for future rent shall constitute a
provable debt and shall be liquidated under § 63(b) of this Act,"
is to be related to this novel procedure, and not taken as an
amendment of § 63(a) or as declaratory of its meaning. P.
291 U. S.
336.
4. A covenant by a tenant to indemnify the landlord for loss of
rent he may suffer during the residue of the term after reentry by
the
Page 291 U. S. 321
landlord upon the bankruptcy of the tenant, and which can come
into operation only after the bankruptcy, and only if the landlord
sees fit to reenter on that ground, is not a basis for a debt
provable in the bankruptcy proceedings. P.
291 U. S.
338.
5. Such a covenant is not the equivalent of an agreement that
bankruptcy shall be a breach of the lease and that the consequent
damages to the lessor shall be measured by the difference between
the present value of the remainder of the term and the total rent
to fall due in the future. P.
291 U. S.
338.
66 F.2d 470, 473, affirmed.
Review by certiorari, 290 U.S. 619, of orders sustaining the
rejection of claims for loss of future rents, in two bankruptcy
cases.
Page 291 U. S. 328
MR. JUSTICE ROBERTS delivered the opinion of the Court.
These cases present the question whether a landlord may prove in
bankruptcy 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
bankruptcy, 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., Inc., was the
lessee of premises for a term of nine years and eight months
beginning 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 bankruptcy 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 it asked to have liquidated at $25,000, the difference
between the rent reserved and the present rental value.
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
assignment for the benefit of creditors, or if bankruptcy
proceedings should be instituted by or against the tenant, the
landlord might without notice reenter the premises, and, after
obtaining possession, 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 Landlord the
deficit accruing from the difference between the amount to be paid
as rent as herein reserved and the
Page 291 U. S. 329
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 expiration 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 provable
debt. The District Court and the Circuit Court of Appeals were of
the same opinion. [
Footnote
1]
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,
". . . and upon entry as aforesaid, this lease shall determine,
and the Lessee covenants that in case 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
proceeded to collect rents from the occupants of the demised
premises, and January 13, 1933,
Page 291 U. S. 330
they filed a proof of claim which as amended included an item of
$4,404.40, representing the difference between the rent accrued to
the date of reentry and the collections from occupants during that
period, and an item of $140,615.80, representing the difference
between the alleged rental value for the remainder of the term
after reentry and the rent reserved in the lease. Petitioners made
application for liquidation of their claim under § 63(b) of the
Bankruptcy 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 Circuit Court of Appeals.
[
Footnote 2]
The controversy hinges upon the interpretation of the following
sections of the Bankruptcy Act:
"Sec. 63.
Debts which may be proved. (a) Debts of the
bankrupt 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 petition
against him, whether then payable or not, with any interest thereon
which would have been recoverable at that date or with a 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 the
estate. [
Footnote 3]"
"Section 1(11) 'Debt' shall include any debt, demand, or claim
provable in bankruptcy. [
Footnote
4]"
"Sec. 17. A discharge in bankruptcy shall release a bankrupt
from all of his provable debts. . . . [
Footnote 5] "
Page 291 U. S. 331
A majority of the Circuit Court of Appeals felt bound to follow
its earlier decision in
In re Roth & Appel, 181 F.
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 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 adjudication 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.
S. 273, has settled the provability of claims contingent
in the sense that no sum is presently payable, thus destroying the
principal ground of decision in
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
Assn., 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
disagreement. They argue that a claim for rent is founded upon a
lease which is an express contract within the words of § 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
rehabilitation, and the unfairness to the landlord of a corporate
bankrupt who, under the decision below, cannot prove upon his lease
along with other creditors,
Page 291 U. S. 332
but must look solely for redress for loss of future rents to a
corporate 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
legislative history of the bankruptcy laws passed by Congress, and
insists that the preponderant construction of them by the courts
excludes claims for future rents from the class of provable
debts.
The issue is not one of power, for plainly Congress may permit
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
similar provisions in earlier Acts, and § 63 of the present
Act.
In England, such claims were not provable under the Act of 7
Geo. I, c. 31;
Mayor v. Steward, 4 Burr. 2439, and a
discharge could not be pleaded in defense of an action for rent
accruing subsequent to bankruptcy.
Boot v. Wilson, 8 East,
311. The landlord's claim for loss of future rent was made provable
by the Act of 32 and 33 Vict., c. 71, § 23 (1869), and more
explicit provisions to the same effect were embodied in that of 46
and 47 Vict., ch. 52, §§ 37 and 55 (1883).
The Act of Congress approved April 4, 1800, [
Footnote 6] 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.
Page 291 U. S. 333
Judah, 2 Caines 25;
Lansing v. Prendergast, 9
Johns. 127.
The Act of August 19, 1841, § 5, 5 Stat. 440, 444, expressly
allowed proof of contingent claims, [
Footnote 7] specifying certain classes and adding a
general description of contingent debts, but said nothing about
rent. 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 v. Kuhn, 8 Watts
& S. 183;
Stinements v. Ainslie, 4 Denio 573;
Savory v. Stocking, 4 Cush. 607.
The Act of March 2, 1867, § 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
bankruptcy. [
Footnote 8] The
courts uniformly
Page 291 U. S. 334
held that claims for future rent or for damages for breach of
covenant to pay rent were not provable under the act, though
differing as to the reason, some holding them not contingent claims
within the statutory definition, and others thinking the express
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. No. 6,725;
Ex parte Lake,
Fed.Cas. No. 7,991;
In re Croney, Fed.Cas. No. 3,411;
In re Commercial Bulletin Co., Fed.Cas. No. 3,060;
In
re May, Fed.Cas. No. 9,325;
In re Hufnagel, Fed.Cas.
No. 6,837;
Bailey v. Loeb, Fed.Cas. No. 739.
In the year 1880, Circuit Judge John Lowell of Massachusetts, at
the suggestion of several mercantile associations, drafted a
proposed bankruptcy 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 bankruptcy." [
Footnote 9]
After much agitation by trade associations and commercial
bodies, and after prolonged consideration (
see Schall v.
Camors, 251 U. S. 239,
251 U. S.
250), Congress adopted the Act now in force, that of
July 1, 1898. [
Footnote 10]
The committee reports do not disclose the origin of the phraseology
of § 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 decisions interpreting them, and
with the test of the
Page 291 U. S. 335
Lowell Bill and the English act then in force. In view of the
extended consideration and discussion which preceded the passage of
the Act, the failure to include a provision for claims for loss of
rent or for damages consequent on the abrogation of leases is
significant of an intent not to depart from the precedents
disallowing them.
Schall v. Camors, supra, pp.
251 U. S.
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 § 63.
In re Ells, 98
F. 967;
In re Mabler, 105 F. 428;
Atkins v.
Wilcox, 105 F. 595. Since 1900, the Circuit Courts of Appeals
in six circuits, and the District Courts in another, have agreed
with these early adjudications.
Slocum v. Soliday, 183 F.
410;
McDonnell v. Woods, 298 F. 434;
In re Roth &
Appel, supra; In re Mullings Clothing Co., 238 F. 58;
In
re Metropolitan Chain Stores Inc., 66 F.2d 482;
Trust Co.
of Georgia v. Whitehall Holding Co., 53 F.2d 635;
Orr v.
Neilly, 67 F.2d 423;
Wells v. Twenty-First Street Realty
Co., 12 F.2d 237;
Britton v. Western Iowa Co., 9 F.2d
488;
Colman Co. v. Withoft, 195 F. 250;
Bray v.
Cobb, 100 F. 270;
In re Hook, 25 F.2d 498. The
decisions in the Third Circuit 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 F. 742;
South Side Trust Co. v. Watson, 200
F. 50;
In re H. M. Lasker Co., 251 F. 53;
Rosenblum v.
Uber, 256 F. 584. The Court of Appeals of the Seventh Circuit
has not discussed 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
Page 291 U. S. 336
482;
compare In re Desnoyers Shoe Co., 227 F. 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 not, however, expressed disapproval of the rulings of
the great majority of the lower federal courts, and has cited many
of their decisions with apparent approbation.
See Central Trust
Co. v. Chicago Auditorium Assn., 240 U.
S. 581,
240 U. S.
589-590;
Wm. Filene's Sons Co. v. Weed,
245 U. S. 597;
Gardiner v. Butler & Co., 245 U.
S. 603,
245 U. S. 605;
Maynard v. Elliott, 283 U. S. 273,
283 U. S.
278.
In accord with the well nigh unanimous view of the federal
courts reiterated for over thirty years are statements of leading
text writers. Collier, Bankruptcy, vol. 2, p. 1422; Remington,
Bankruptcy, vol. 2, §§ 789, 793; Loveland, Bankruptcy, vol. 1, §
313.
What of the activities of the Congress while this body of
decisions interpreting § 63(a) was growing? From 1898 to 1932, the
Bankruptcy Act was amended seven times [
Footnote 11] without alteration of the section. This
is persuasive that the construction adopted by the courts has been
acceptable to the legislative arm of the government.
Baltimore
& O. R. Co. v. Baugh, 149 U. S. 368,
149 U. S.
372.
In this situation, "only compelling language in the statute
itself would warrant the rejection of a construction so long and so
generally accepted."
Maynard v. Elliott, supra,
283 U. S. 277.
If the rule is to be changed, Congress should so declare.
The petitioners call attention to the last clause of § 74(a),
which is one of the sections added to the Act in 1933: [
Footnote 12] "A claim for future
rent shall constitute a
Page 291 U. S. 337
provable debt, and shall be liquidated under § 63(b) of this
Act." Sections 73 to 76, inclusive, were enacted to permit
extensions and compositions not theretofore possible. They apply
only to individuals. It is highly unlikely that, if the quoted
sentence had been intended as an amendment of § 63(a), it would
have been placed in context dealing only with the novel procedure
authorized by the new 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 § 63(a) as it then
stood. [
Footnote 13] The
petitioners insist the clause is declaratory of the law, as
understood by the Congress, but there is no evidence to support
this view and it is inconsistent with the longstanding contrary
judicial construction.
It remains to consider the effect of the indemnity covenants in
the leases. These do not provide for liquidation of damages
(
compare Wm. Filene's Sons Co. v. Weed, supra), nor indeed
for any right to damages for breach of the covenant to pay
rent.
In No. 505, the agreement is, in the event of reentry and
reletting 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 premises
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 tenant from all liability under the covenant, which the
landlord is authorized to do, thus terminating all rights and
liabilities under the agreement of lease.
In No. 506, the stipulation is that, upon bankruptcy, the
landlord may reenter, and thereby terminate the lease, and
Page 291 U. S. 338
the lessee covenants that, in such case, "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
terminate the lease. Neither the bankrupt nor 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 contract, distinct from that involved in the original letting,
becomes operative. While there is 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 true as
respects these independent 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 bankruptcy, and cannot be breached until the duty of
indemnifying the landlord arises. That obligation cannot be
complete until the expiration 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 proceedings, the fulfillment of which is contingent on what may
happen from month to month or up to the end of the original term.
Compare In re Ells, supra; Slocum v. Soliday, supra; In re Roth
& Appel, supra. Such a covenant is not, as petitioners
contend, the 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 the
remainder
Page 291 U. S. 339
of the term and the total rent to fall due in the future. The
covenants appearing in the leases in question cannot be made the
basis of a proof of debt against the estate.
The judgments are
Affirmed.
* Together with No. 506,
Brown et al. v. Irving Trust Co.,
Trustee in Bankruptcy, certiorari to the Circuit Court of
Appeals for the Second Circuit.
[
Footnote 1]
66 F.2d 470.
[
Footnote 2]
Brown v. Irving Trust Co., 66 F.2d 473.
[
Footnote 3]
U.S.C. Title 11, § 103(b).
[
Footnote 4]
U.S.C. Title 11, § 1(11).
[
Footnote 5]
U.S.C. Title 11, § 35.
[
Footnote 6]
2 Stat. 19, 32, § 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 payable before the time of his or her
becoming bankrupt. . . ."
[
Footnote 7]
". . . All creditors whose debts are not due and payable until a
future day, all annuitants, holders of bottomry and respondentia
bonds, holders of policies of insurances, sureties, endorsers,
bail, or other persons having uncertain 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 claims become absolute, to have the same allowed them,
and such annuitants and holders of debts payable in future may have
the present value thereof ascertained under the direction of such
court and allowed them accordingly as debts
in praesenti.
. . ."
[
Footnote 8]
". . . In all cases of contingent debts and contingent
liabilities contracted by the bankrupt, and not herein otherwise
provided for, the creditor may make claim therefor, and have his
claim allowed, with the right to share in the dividends, 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 allowed to prove for the amount so ascertained."
"
* * * *"
"Where the bankrupt is liable to pay rent or other debt falling
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."
[
Footnote 9]
The bill in full appears in the Congressional Record, vol. 14,
pp. 43-48.
[
Footnote 10]
30 Stat. 544, c. 541.
[
Footnote 11]
Acts of February 5, 1903, c. 487, 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, c. 22, 42 Stat. 354
(11 U.S.C.A § 35); May 27, 1926, c. 406, 44 Stat. 662; February 11,
1932, c. 38, 47 Stat. 47.
[
Footnote 12]
Act of March 3, 1933, 47 Stat. 1467.
[
Footnote 13]
Cong.Rec. Senate, Feb. 24, 1933, pp. 5058, 5059; Feb. 27, 1933,
p. 5278.