1. In a railroad reorganization under § 77 of the Bankruptcy
Act, upon rejection by the trustees of a 999-year lease of street
railway properties having 969 years to run, the measure of the
lessor's damages is the present value of the rent reserved less the
present rental value of the remainder of the term.
Connecticut
Railway & Lighting Co. v. Palmer, 305 U.
S. 493,
305 U. S. 504.
P.
311 U. S.
555.
2. In applying this rule to so long a lease, since the evidence
of damages is necessarily limited to a period of definite forecast,
the damage may be estimated for a limited future period upon
evidence of rental value derived from a period of past operation of
the leased property. P.
311 U. S.
555.
There being no suggestion that the rental agreed upon was other
than a reasonable return upon the value of the demised property,
fairly negotiated, it is fair to presume, until something else is
shown, that, for the long years ahead, the rent and rental value
are the same. Consequently, proof of rental value smaller in amount
than the rent reserved, for a term of years shorter than the
remainder of the lease, is, in the absence of evidence as to other
years, proof of the damage in such shorter period. P.
311 U. S.
557.
3. Opinion evidence of rental value may be considered in
determining the lessor's damages, but has little, if any, probative
force beyond the immediate years, and cannot be permitted to fix
rental value for the purpose of determining damages in the
indefinite future. P.
311 U. S.
556.
4. Upon evidence of past earnings of demised street car
properties over a period of fourteen years, including three years
of operation by the lessor after rejection of the lease, the
Circuit Court of Appeals, reversing the District Court, estimated
the probable earnings for eleven years succeeding the rejection,
upon the basis of which, and of the rent reserved for that period,
it found and awarded damages to the lessor.
Held:
(1) There being no dispute over the facts proven, the
sufficiency of the proof of damage was for the Court of Appeals. P.
311 U. S.
558.
Page 311 U. S. 545
(2) This Court, on this review, deals with the method of proving
damages, not the measure. P.
311 U. S.
558.
(3) The evidence formed an adequate basis for a reasoned
judgment, and justified an award. P.
311 U. S.
558.
(4) Although the business changed from trolley to bus
transportation within two years of the end of the base period, and
management changed from lessee to lessor, in view of the
established character of the business, these changes were not
sufficient to affect the probative value of past experience. P.
311 U. S.
559.
(5) Nothing is more indicative of the value of franchises and
properties of street railways and bus lines, for lease or sale,
than past earnings. P.
311 U. S.
560.
(6) In proving compensatory damages, certainty in the fact of
damage is essential; certainty as to the amount goes no further
than to require a basis for a reasoned conclusion; the injured
party is not to be barred from a fair recovery by impossible
requirements. P.
311 U. S.
560.
(7) The failure of the lessor to produce further evidence,
through experts or transportation surveys, was not fatal to its
case. P.
311 U. S.
561.
109 F.2d 568 affirmed.
Certiorari, 309 U.S. 653, to review a judgment reversing an
order of the District Court and awarding damages to the present
respondent for rejection of its lease in a railroad reorganization
case.
Page 311 U. S. 551
MR. JUSTICE REED delivered the opinion of the Court.
This certiorari, which we allowed because of its importance,
involves problems of proving a lessor's claim for damages for
rejection of its lease in a proceeding under Section 77 of the
Bankruptcy Act. The lease, demising respondent's street railway
properties and equipment in Connecticut for 999 years from 1906,
was rejected on December 18, 1935, by petitioners, the trustees of
the debtor, the New York, New Haven, and Hartford Railroad Company.
[
Footnote 1] The annual rent
reserved at rejection was close to $1,050,000 with tax, sinking
fund, interest,
Page 311 U. S. 552
and bond retirement adjustments which are not material to our
discussion.
After rejection, the lessor filed a claim for damages under
subsection (b) of Section 77. The applicable provisions are as
follows:
". . . In case an executory contract or unexpired lease of
property shall be rejected, . . . any person injured by such . . .
rejection shall, for all purposes of this section, be deemed to be
a creditor of the debtor to the extent of the actual damage or
injury determined in accordance with principles obtaining in equity
proceedings. . . ."
The claim was allowed, limited to the damages accrued or which
might accrue before the winding up of the reorganization. This
Court, on a previous certiorari, [
Footnote 2] disapproved that measure of damages and laid
down as the measure "the present value of the rent reserved less
the present rental value of the remainder of the term." On remand
to the district court, the lessor undertook to prove damages
according to the approved measure by introducing evidence of the
present value (January 1, 1936) at four percent discount, of the
rent reserved under the lease for forty years only (to December 31,
1975). This amounted to around twenty million dollars. For a
corresponding period, evidence of rental value, similarly
discounted, was offered. The difference was submitted as the
damages for rejection. No proof of rent reserved or rental value
beyond the forty years was offered, as respondent was advised such
proof would be too uncertain to carry conviction.
To prove rental value, respondent offered evidence of annual
earnings for each of the forty years. These earnings were made up
of the earning power of a sinking fund, plus an adjustment of the
annual payments required
Page 311 U. S. 553
by the lease to be made to the sinking fund, plus the operating
profits of the transportation properties. For 1936-1938, the actual
earnings were used. This was the period after rejection and before
trial when the demised properties were operated by or for
respondent. For 1939-1975, earnings were estimated by alternative
calculations of average annual earnings, before federal taxes, over
four prior base periods each ending December 31, 1938: (1) the
preceding year and a half of 100% bus operation; (2) the three
years of actual operation, following rejection, during which the
transition from trolleys to buses had been completed; (3) ten
years, 1929-1938, the accounts for which were partly reconstructed
because, before the reorganization, the demised premises were
utilized in conjunction with others not involved here; and,
finally, (4) fourteen years, 1925-1938. [
Footnote 3] The earning power of the sums in the
sinking fund and the annual payments to it were assumed to be
fixed. To get the rental value, these two fixed sums were added to
the operating profit calculated from each of the four base periods.
Since earnings were erratic, varying from $78,000 to $775,000 in
the fourteen-year period, the annual rental value for the future
varied according to the base used. Likewise, the damages calculated
for forty years showed a range of from nine and a half to thirteen
and a third million. It is substantially correct to say that no
evidence in disagreement with the base figures was produced for the
petitioner. Nor did petitioner introduce any evidence on its part
to establish a different amount of damages.
The district court refused to find future earnings by protecting
the average earnings of any of the four base
Page 311 U. S. 554
periods. It pointed out that, in its view, the 100% bus
operation was too new, and had coincided with too great a shrinkage
of earnings, to serve as a safe guide. The data for 1936-1938 were
deemed unconvincing because they were derived in a substantial
measure from trolley operations, now abandoned, and because the
period was one of economic depression. The ten- and the
fourteen-year bases were disapproved as irrelevant because of
trolley operation, and as speculative because of the impossibility
of forecasting the relative frequency of profitable and
unprofitable years from this past experience. The court pointed out
that no evidence of transportation experts or surveys was offered
to assist it in appraising possibilities of the development of the
territory, of increased operating efficiency, or the effects of
consolidation. [
Footnote 4]
Furthermore, the trial court was of the view that, even with
acceptable proof of annual rental value for forty years or other
period materially shorter than the unexpired term of the lease, no
conclusion could be reached as to the present rental value of the
remainder of the term, because that portion of the term beyond the
reach of the proof offered might have profits or losses which would
upset the calculations for earlier years. The district court then
struck out the accrued damages of more than a million dollars
allowed on the former hearing, and set aside the provision of the
same order permitting accrued damages to be proven up to the date
of final hearing.
The circuit court of appeals was of the view that,
"in effect, the law for purposes of damages treats a lease with
969 more years to run as if it were only for a term within the
reach of fairly definite forecast."
It thought that the evidence of earnings over the
Page 311 U. S. 555
14-year experience was adequate to enable it to draw a reasoned
conclusion as to probable earnings for eleven years. For the three
years 1936-1938, these were known; for the other eight years, the
average annual earnings for the preceding 14-year period were
adopted. An allowance of the damages at time of rejection was made
in the amount of $4,411,837.61. [
Footnote 5]
The certiorari brings here the questions of whether proof of
damages for a portion of an unexpired lease is sufficient to fix
damages for the whole remaining term, and whether the circuit court
of appeals may allow damages on the sole basis of past earnings,
evidence which the district judge has held does not satisfy his
mind.
First. Litigation over a 999-year lease naturally
brings up incidents difficult to reconcile with known and
established legal formulae. Since conveyancers and business men
alike have long utilized the characteristic provisions of leases to
accomplish transfers of rights in real estate for extensive periods
without payment of the purchase price, such long-term agreements
have become a well recognized legal implement, especially in
corporate realty transactions and railroad consolidations and
mergers. Its reservations of rent, provisions for taxes and
operation are firmly embedded in our financial, corporate, and
title structures. [
Footnote 6]
Business and government alike are accustomed
Page 311 U. S. 556
to fix the rental value of property for long-term leases and the
value of the lease over and above the rent reserved at varying
periods of the term. [
Footnote
7] In pending railroad reorganizations themselves, appraisals
of rental values must be considered. [
Footnote 8] That such determinations recur with some
frequency demonstrates their practical possibility.
The petitioner contends, however, that evidence of rental value
for a 40-year period, no matter how certain it may be, is
inadequate to enable a court to establish the damages for the
entire 969 remaining years. Its argument is that one cannot be sure
the truncated portion will not show sufficient gain to absorb all
losses. Since certain proof for distant years cannot be produced,
this objection leaves the lessor to qualified opinion evidence as
to annual rental value, discounted for the term to show present
damage. Such an opinion necessarily
Page 311 U. S. 557
proceeds from presumably adequate knowledge of what lessees
desiring but not requiring the facilities would be willing to pay
for a new lease and lessors, in a similar attitude toward renting,
to accept for the remainder of the term. While such evidence is
admissible for consideration in forming a judgment upon damages, it
has little, if any, probative force beyond the immediate years.
Certainly such opinion evidence alone cannot be permitted to fix
rental value for purposes of damages in the indefinite future. The
final objective of the proof is not how much the remainder is worth
now, but what damages the lessor has suffered. For this, he is
awarded compensation. The measure of that damage is rent less
rental value, a matter of judgment to be reached in the light of
pleading and proof supplemented by judicial knowledge.
The law, for purposes of damages, does not treat a broken lease
of a thousand years as though it ran only for a limited time, the
damages for which are measurable. But, since evidence of the damage
is necessarily limited to a time of "definite forecasts," the rule
of rental value permits the use of data for only a limited number
of years to determine damages. The number of years to be considered
depends upon the fullness and quality of the evidence offered to
establish the damages. Hence, whether a limited term beyond the
reach of forecasts or the whole term is to be used as a base for
rental value, the evidence of earnings would be projected the same
number of years. This, we think, is what was meant by the circuit
court of appeals when it treated the lease "in effect" as one with
a term within the range of predictability as to rental value.
However nebulous the concept of a long lease may be, it is not a
fiction, but an actual instrument. Nothing appears in the record to
suggest that the rental agreed upon was other than a reasonable
return upon the value of the demised property, fairly negotiated.
At the time
Page 311 U. S. 558
the lease was executed, it is fair to assume the parties thought
the annual rent reserved and rental value were the same. Without
proof to the contrary, only nominal damages would be allowed the
claimant. And, until something else is shown, courts are entirely
justified in assuming that, for the long years ahead, the rent and
the rental value are the same. [
Footnote 9] As a consequence, evidence of rental value
smaller in amount than the rent reserved for a term shorter than
the remainder of the lease is, in the absence of testimony as to
other years, proof of the damages for the years covered. Since the
presumption is that the rent and rental value for the remainder of
the term are the same, the damage proven is to be considered as all
the damage for the rejection of the lease.
Second. The petitioner also contends that the circuit
court of appeals erred in setting aside the district court's decree
refusing the claim on the ground that the evidence, detailed above,
did not satisfy the mind as to the amount of damages. In the view
of the trial court, there was a failure of proof. The correctness
of the judgment of the appellate court in directing an allowance of
the claim depends not upon its power, which we think is clear,
[
Footnote 10] but upon its
conclusion as to the persuasive character of the evidence, whether
it is too speculative, whether it showed the damage to reasonable
certainty. As there was no significant dispute over the facts
proven, the conclusion as to the sufficiency of the evidence was
for the reviewing court. We deal, in this review, with the method
of the proof of damages, not the measure. Narrowed even more, the
issue is whether the evidence offered justifies an award, whether
the quantum of proof produced forms an adequate basis for a
reasoned judgment.
Page 311 U. S. 559
Future rental value cannot be susceptible of precise proof. As
it depends, so far as the amount of damages for breach of a lease
is concerned, upon future profits, it partakes of the nature of
loss of earning capacity or of credit. To require proof of rental
value approaching mathematical certitude would bar a recovery for
an actual injury suffered. All that can be done is to place before
the court such facts and circumstances as are available to enable
an estimate to be made based upon judgment and not guesswork.
[
Footnote 11] Every
anticipatory breach of an obligation, and every appraisal of damage
involving the present value of property involves a prediction as to
what will occur in the future. Present market value of property is
but the resultant of the prediction of many minds as to the
usability of property and probable financial returns from that use,
projected into the future as far as reasonable, intelligent men can
foresee the future.
The proof of future profits by the evidence of past profits in
an established business gives a reasonable basis for a conclusion.
[
Footnote 12] It is true
that this business changed from trolley to bus within two years of
the end of the base period, and that management changed from lessee
to
Page 311 U. S. 560
lessor, but we think the fact of transportation in the same
communities for more than a quarter of a century sufficed to give
the operation the classification of an established business. Here,
different methods of operation or normal changes in the executive
staffs do not seem sufficient to interfere with the probative value
of past experience. Franchises and property of street railways and
bus lines are difficult of appraisal. Nothing is more indicative of
their value for lease or sale of the fee than past earnings. If we
were to adopt the view that the interest conveyed is a defeasible
fee, [
Footnote 13] its
defeasance dependent upon a condition such as nonpayment of annual
instalments of the purchase price, the same difficulties exist. The
unknown subtrahend would be the present value, instead of the
rental value. Evidence of value would be made up of the items of
proof. One of the most important of these, in the case of property
such as here involved, would be past earnings.
This Court has sustained recoveries for future profits over four
years based solely upon evidence of the profits of an established
business for the past four years. We there approved an instruction
which told the jury,
"Damages are not rendered uncertain because they cannot be
calculated with absolute exactness. It is sufficient if a
reasonable basis of computation is afforded, although the result be
only approximate. [
Footnote
14]"
The ways compensatory damages may be proven are many. The
injured party is not to be barred from a fair recovery by
impossible requirements. The wrongdoer should not be mulcted,
neither should he be permitted to escape under cover of a demand
for nonexistent
Page 311 U. S. 561
certainty. [
Footnote 15]
Damages for breach of the lease were in contemplation of the
parties when the contract was made. [
Footnote 16] The lease contained a covenant of reentry
without prejudice to right of action for arrears of rent or breach
of covenants. The provision in the Bankruptcy Act gives a new right
of recovery in bankruptcy only. This right of recovery is an
unsecured claim of the character of a claim for a deficiency above
the value of inadequate collateral.
Certainty in the fact of damage is essential. Certainty as to
the amount goes no further than to require a basis for a reasoned
conclusion. [
Footnote 17]
The certainty of the evidence as to damages for rejection of a
lease depends upon the same tests as in other situations where
damages are difficult of proof. This Court, recently, in an
infringement case, [
Footnote
18] was required to appraise the value of opinion evidence as
to the part of profits attributable to the use of a pirated play,
an obviously elusive fact. No expert thought any greater percentage
than ten should be attributed to the play. The lower court allowed
twenty so that the award might by no possibility be too small. We
approved, because "what is required is not mathematical exactness,
but only a reasonable approximation. That, after all, is a matter
of judgment. . . ."
Satisfactory evidence was presented for the three years of
actual operation of the properties covered by this lease. We think
that prior earnings of the same property over fourteen years was a
fair base to use to project the estimate of the earnings for the
eight years of future
Page 311 U. S. 562
operation. The failure to produce further evidence, either
through experts or transportation surveys, was not fatal to
respondent's case, even though such evidence is admissible. We see
no reason to disagree with the conclusion of the circuit court of
appeals that, under the evidence presented, the damages for eight
years might be predicted with a "fair degree of certainty."
Affirmed.
[
Footnote 1]
The lease originally covered additional properties, but, as to
these, the debtor no longer had an interest.
[
Footnote 2]
Connecticut Railway & Lighting Co. v. Palmer,
305 U. S. 493,
305 U. S.
504.
[
Footnote 3]
To fill out the data, petitioner calculated the proportionate
rent reserved and the actual earnings for the short period between
the date of rejection, December 17, 1935, and January 1, 1936.
[
Footnote 4]
See another New Haven long-term lease,
In re New
York, N.H. & H. R. Co., 30 F. Supp. 541, where evidence of
this kind appears.
[
Footnote 5]
The preciseness of this figure as to the amount of damage is
illusory. It is obtained by accepting estimated interest rate and
average earnings for eight years in the future, reduced to present
cash value, as shown by respondent on a table covering forty years,
and deducting this from the agreed rent, discounted.
[
Footnote 6]
Nearly forty thousand miles of road are leased by Class I
railroads from 292 lessors. Class I roads operate over 93 percent
of all railroad mileage. Leased property represents over 15 percent
of this total. Over four billion dollars is invested in railroad
property under lease. Tables 1, 129, 156, and 162. Statistics of
Railways in the United States 1938.
See Meck & Masten,
Railroad Leases and Reorganization, 49 Yale Law Journal 626.
[
Footnote 7]
Tax cases: in many tax cases, long-term leases have been valued,
though frequently without any statement of the evidence or method
used. Appeal of Northern Hotel Co., 3 B.T.A. 1099, 1102; Appeal of
Newman Theater Co., 4 B.T.A. 390; L. S. Donaldson Co. v.
Commissioner, 12 B.T.A. 271; A. H. Woods Theater Co. v.
Commissioner, 12 B.T.A. 827; Consolidated Investment Co. v.
Commissioner, 13 B.T.A. 1252; Hotel Wisconsin Realty Co. v.
Commissioner, 16 B.T.A. 334; James Bldg. Co. v. Commissioner, 22
B.T.A. 658; Martha Realty Co. v. Commissioner, 22 B.T.A. 342, 344;
People ex rel. Delaware & Hudson Canal Co. v. Feitner,
61 App.Div. 129, 70 N.Y.S. 500;
Appeal Tax Court v. Western
Maryland R. Co., 50 Md. 274, 298;
Philadelphia, W. &
B. R. Co. v. Appeal Tax Court, 50 Md. 397;
People ex rel.
Gorham Mfg. Co. v. State Tax Comm'n, 197 App.Div. 852, 189
N.Y.S. 241. Eminent domain cases:
Matter of Delancey St. in
City of New York: Beers v. Schlessinger, 120 App.Div. 700, 105
N.Y.S. 779;
In re Park Site, 247 Mich. 1, 225 N.W. 498.
Contract cases:
Bondy v. Harvey, 218 App.Div. 126, 217
N.Y.S. 877;
Williams v. Burrell, 1 C.B. 402.
[
Footnote 8]
E.g., New York, New Haven & Hartford Railroad
Company Reorganization, 239 I.C.C. 337, 351, 386, 387, 389, 453;
In re Chicago, Milwaukee, St. Paul & Pacific R.
Co., 36 F. Supp.
193, 205
et seq.; same, 239 I.C.C. 485, 537, 553; Erie
Railroad Company Reorganization, 239 I.C.C. 653, 685, 689.
[
Footnote 9]
2 Sedgwick, Damages, 9th Ed., § 610.
[
Footnote 10]
Cf. Ridings v. Johnson, 128 U.
S. 212,
128 U. S. 218;
United States v. Rio Grande Dam & Irrigation Co.,
184 U. S. 416,
184 U. S.
423.
[
Footnote 11]
Story Parchment Co. v. Paterson Parchment Paper Co.,
282 U. S. 555,
282 U. S. 563;
Eastman Kodak Co. v. Southern Photo Materials Co.,
273 U. S. 359,
273 U. S. 379;
Eckington & S.H. R. Co. v. McDevitt, 191 U.
S. 103,
191 U. S.
112-113;
cf. dicta in
United States v.
Behan, 110 U. S. 338,
110 U. S. 344;
see Restatement, Contracts § 331, particularly comment(a);
United States Trust Co. v. O'Brien, 143 N.Y. 284, 290, 38
N.E. 266;
Ball v. T. J. Pardy Construction Co., 108 Conn.
549, 551, 143 A. 855;
Commonwealth Trust Co. v. Hachmeister
Lind Co., 320 Pa. 233, 181 A. 787; 1 Sedgwick, Damages, 9th
Ed., § 170(a)
et seq.; 1 Sutherland, Damages, 4th Ed., §
67.
[
Footnote 12]
5 Williston, Contracts, Rev.Ed., § 1346 A; Bagley v. Smith, 10
N.Y. 489, 498;
Dickinson v. Hart, 142 N.Y. 183, 188, 36
N.E. 801;
Macan v. Scandinavia Belting Co., 264 Pa. 384,
392, 107 A. 750;
Commonwealth Trust Co. v. Hachmeister Lind
Co., 320 Pa. 233, 242, 181 A. 787.
[
Footnote 13]
Ocean Grove Camp Meeting Assn. v. Reeves, 79 N.J.L.
334, 338, 339, 75 A. 782.
[
Footnote 14]
Eastman Kodak Co. v. Southern Photo Materials Co.,
273 U. S. 359,
273 U. S.
379.
[
Footnote 15]
Story Parchment Co. v. Paterson Parchment Paper Co.,
282 U. S. 555,
282 U. S.
564-565;
Eastman Kodak Co. v. Southern Photo
Materials Co., 273 U. S. 359,
273 U. S. 379;
Hetzel v. Baltimore & O. R. Co., 169 U. S.
26,
169 U. S.
37-38.
[
Footnote 16]
Hadley v. Baxendale, 9 Exch. 341.
[
Footnote 17]
Story Parchment Co. v. Paterson Parchment Paper Co.,
282 U. S. 555,
282 U. S. 562,
563; 1 Sedgwick, Damages, 9th Ed., § 170;
United States Trust
Co. v. O'Brien, 143 N.Y. 284, 289, 38 N.E. 266.
[
Footnote 18]
Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.
S. 390,
309 U. S.
406-408.
MR. JUSTICE FRANKFURTER dissenting.
On January 3, 1939, this Court unanimously decided that the
"actual damage or injury" caused the lessor through the
disaffirmance by the trustees of the New Haven of the lease now in
controversy was a provable claim.
Connecticut Ry. &
Lighting Co. v. Palmer, 305 U. S. 493. If
Congress had intended to rule out the legal provability of a claim
for damages arising through the disaffirmance of what remains of a
999-year lease, it could easily have done so, instead of providing
for proof of the damages flowing from the termination of such an
unexpired lease. And if, upon the prior consideration of the status
of this very lease, this Court had intended to rule that loss due
to the disaffirmance of the unexpired term of 969 years is in the
nature of things beyond rational proof, it surely would not have
taken twelve pages to avoid saying so. Both Congress and this Court
have thus sponsored the conviction that proof of some damage is not
outside the adjudicatory process.
But what is to be assessed is the value of a terminated
long-term lease, and not the value of an included short-term.
Therefore, neither the decision of the district court nor that of
the circuit court of appeals in reversing it seems to me
satisfactory. Although the two courts reached contradictory
conclusions, their views appear to suffer from the same intrinsic
vice. Starting with man's inability to pierce into a future of 969
years, both courts
Page 311 U. S. 563
deemed the present value of a lease running for such a period
beyond calculable forecast. Therefore, Judge Hincks said, in
effect, when an end is put to the benefits accruing from such a
lease, the loss to the lessor cannot be translated into dollars and
cents. Judge Patterson, on the other hand, treated the lease as
though it were a lease for an ascertainable included short term,
and deemed eleven years as the limit for sure judgment. Since the
lease is not a short-term lease, it is, according to the district
court, nothing for purpose of giving rise to damages. Since the
lease is for too long a term, we will snip off an included short
term as though it were a short-term lease, concluded the circuit
court of appeals.
Both these dispositions result in avoidance, through
over-simplification, of an extremely complicated problem which
Congress has put up to the courts. Since neither the district court
nor the circuit court of appeals applied the directions of this
Court in
Connecticut Ry. & Lighting Co. v. Palmer,
supra, however difficult and subtle they may have been,
neither disposition should stand. The case should be sent back to
the district court, where an opportunity should be given to make
proofs appropriate to the nature of the problem to be solved --
namely, ascertainment on a tough business basis of the damage that
sprang into existence from the disaffirmance of the remaining
969-year term, rather than from the disaffirmance of a supposed
11-year lease.
MR. JUSTICE DOUGLAS, dissenting.
MR. JUSTICE BLACK and I and of the view that respondent's proof
was wholly inadequate to establish under § 77(b) of the Bankruptcy
Act the extent of its "actual damage or injury" as a result of the
rejection of this lease, since the evidence offered failed to show
what was "the present value of the rent reserved less the present
rental
Page 311 U. S. 564
value of the remainder of the term" -- the measure of damages
established for this very claim in
Connecticut Railway &
Lighting Co. v. Palmer, 305 U. S. 493,
305 U. S.
504.
We are dealing here with an unexpired term of 969 years. But the
claim allowed is for a term which does not cover that span. It
covers only an unexpired term of 11 years. For the reasons stated
in
Kuchner v. Irving Trust Co., 299 U.
S. 445, we think that, if Congress had provided in § 77
that lessors should not be allowed to prove for damages in excess
of an 11-year unexpired term, the limitation would be
constitutional. Such legislation would have a firm constitutional
basis in the bankruptcy power. But the making of such a limitation
is a legislative, not a judicial, function. In view of the wording
of § 77(b), we do not think this Court has the power to substitute
the value of one property interest for the value of an entirely
different one. Sec. 77(b) says that "actual damage or injury" shall
be allowed. Yet it would be a mere coincidence if "actual damage or
injury" for an 11-year term were the "actual damage or injury" for
a 969-year term. Hence, the District Court correctly refused to
substitute any lesser term for the one here in question. No
authority, we believe, can be found which can justify speculating a
claimant into a loss through the easy assumption that he had a
property interest which in fact he did not have.
There is a related objection to the allowance of this claim. It
is plain that any attempted computation of future rental values of
this property for the next 969 years would, at best, be a mere
flight "into the realm of pure speculation" which this Court
condemned when the case was here before.
305 U. S. 305 U.S.
493,
305 U. S. 505.
From our point in history, 969 years hence is perpetuity. It covers
a longer span than from 1941 A.D. to 500 years before Columbus
discovered America. To project past earnings of a present
enterprise through such vicissitudes of time
Page 311 U. S. 565
would be to assume a static quality in society which even a
decade of history would disprove. This was tacitly admitted by
respondent before the District Court. The Circuit Court of Appeals
recognized the impossibility of such a task. It therefore produced
a substitute method. It computed the annual estimated values for
each future year for as long a period as it could venture an
estimate. That, however, misses the nature of the problem. Under
the rule laid down by this Court, the great unknown in such cases
is the "present rental value of the remainder of the term." The
actual damage, if any, to the lessor is suffered all at once. For §
77, like former § 77B (
City Bank Farmers Trust Co. v. Irving
Trust Co., 299 U. S. 433,
299 U. S.
440), extends the doctrine of anticipatory breach
(
Central Trust Co. v. Chicago Auditorium Assn.,
240 U. S. 581) to
leases of realty. Where there is such a breach,
"compensation therefor may be recovered at once for the whole
loss, though the consequence be a continuing one, if the future
damage resulting therefrom can be ascertained with certainty."
James v. Kibler's Adm'r, 94 Va. 165, 173, 26 S.E. 417,
418. The liability of the lessee for damages is single, not
multiple. But § 77(b), unlike some state rules (
Hermitage Co.
v. Levine, 248 N.Y. 333, 162 N.E. 97), calls for an
ascertainment of the full deficiency not at the end of the term,
but on rejection of the lease.
Lessors claiming damages under § 77(b), like claimants in
ordinary bankruptcy proceedings (
Rasmussen v. Gresly, 77
F.2d 252, 254;
Whitney v. Dresser, 200 U.
S. 532), carry the burden of establishing the existence
and amount of the claim. Their proof must satisfy the "usual rules
as to the measure of damages;" they "must show damages to
reasonable certainty."
Connecticut Railway & Lighting
Company v. Palmer, supra, at p.
305 U. S. 505.
While absolute certainty is not required where a claim for damages
is sought (
Hetzel v. Baltimore & Ohio
R.
Page 311 U. S. 566
Co., 169 U. S. 26,
169 U. S. 37),
the evidence must be sufficient for the exercise of an informed
judgment as to the amount. Where the existence or extent of the
damage is a matter of mere conjecture or guess work, the claim will
be denied.
Pennsylvania Steel Co. v. New York City R. Co.,
198 F. 721, 759. When the instant case was here before, the
Pennsylvania Steel Co. case was cited for the statement,
"The difficulties of proof are well recognized." 305 U.S. at
305 U. S. 504.
In the
Pennsylvania Steel Co. case, damages for breach of
a lease with an unexpired term of 995 years were disallowed in
receivership proceedings, the court saying (198 F. at 759):
"Who could foretell the results of operation by the owner, the
growth of the city, improvements in motive power, or reductions in
cost? Who could foresee whether a lease could be made to another
railroad company or the terms thereof? . . . The claim for such
damages was properly disallowed because it was uncertain in amount
and there was no method of making it certain."
Those observations are peculiarly apt when applied to the facts
in this record. Here, there is no evidence as to market value.
Cf. Metropolitan Bldg. Co. v. King County, 62 Wash. 409,
113 P. 1114. Nor has there been any fair,
bona fide
reletting.
Cf. James v. Kibler's Adm'r, supra. In this
record, there is no substantial evidence as to value except
estimated past earnings. Useful as past earnings may be in certain
situations where a short and limited forecast is being made
(
Eastman Kodak Co. v. Southern Photo Materials Co.,
273 U. S. 359),
they are indeed treacherous when used as the sole basis for
appraisal. [
Footnote 2/1] The value
of a going enterprise is dependent on earnings. A forecast of
earnings must take into consideration the numerous and variable
factors
Page 311 U. S. 567
which affect income-producing capacity. [
Footnote 2/2] Those factors vary from business to
business. Here, we are dealing with passenger transportation by
bus. Certainly any forecast of earnings should embrace an expert
study of problems peculiar to this field -- the territory served,
population trends, competitive conditions, the record of companies
in comparable territory, and the like. Any estimate which wholly
ignores such factors and relies entirely on past earnings ignores
the very conditions which alone can impeach or sustain the
credibility of past earnings as a measure of future earnings.
[
Footnote 2/3]
Cf. Hammond
Lumber Co. v. County of Los Angeles, 104 Cal. App. 235, 285 P.
896.
The problem of determining the present value of this unexpired
term of 969 years is not different from the problem of valuing a
fee interest.
The fact that this instrument is called a "lease" is no barrier
to such an appraisal. For, as stated by this Court in
Union
Pacific R. Co. v. Chicago, R.I. & P. Ry. Co., 163 U.
S. 564,
163 U. S. 582,
where a so-called "lease" was construed: "What it was styled by the
parties does not determine its character or their legal relations."
The court has not only the power but the duty to determine its real
character by consideration of all its intrinsic and extrinsic
characteristics.
Id. at p.
163 U. S. 582.
A lease renewable forever or a lease in perpetuity (as here) is the
equivalent of a fee interest. It has been so treated in
Page 311 U. S. 568
Connecticut, where the instant lease was made, for purposes of
taxation.
Connecticut Spiritualist Camp-Meeting Association v.
Town of East Lyme, 54 Conn. 152, 155, 156, 5 A. 849. As stated
in
Piper v. Meredith, 83 N.H. 107, 110, 139 A. 294, 296,
"it is well settled law that a perpetual lease upon condition
conveys to the lessee a determinable or base fee." Or, as stated in
Whittelsey v. Porter, 82 Conn. 95, 102, 72 A. 593, 596, a
999-year lease is "practically a fee defeasible only upon failure
to perform certain conditions."
And see Montgomery v. Town of
Branford, 107 Conn. 697, 702, 142 A. 574;
Wells v.
Savannah, 181 U. S. 531;
Leary v. Jersey City, 248 U. S. 328;
Trustees of Elmira v. Dunn, 22 Barb. 402. The mere
reversionary interest of the lessor in a perpetual lease is so
remote and speculative as to defy valuation.
See Chicago West
Division R. Co. v. Metropolitan West Side Elevated R. Co., 152
Ill. 519, 524-526, 38 N.E. 736. As stated by the Supreme Court of
Errors of Connecticut, the reversion under a 999-year lease becomes
a "mere imaginary estate."
Brainard v. Town of Colchester,
31 Conn. 407, 411. Whatever may be the precise catalogue of all
rights of the lessee (
Goodwin v. Goodwin, 33 Conn. 314;
Dennis' Appeal, 72 Conn. 369, 44 A. 545) and whatever may
have been the business and legal reasons for use of the 999-year
lease, rather than the acquisition of the assets by merger,
consolidation or otherwise, [
Footnote
2/4] it is plain that, for all practical purposes, the lessee
retains such full control and such complete enjoyment of the
property that he may properly be treated as the owner. Such a lease
is, in effect, "a practical sale."
Lord v. Town of
Litchfield, 36 Conn. 116.
Page 311 U. S. 569
Thus, the problem of determining the present value of the
unexpired term of 969 years is no different from determining the
value of land in an action for breach of a contract to purchase it.
There, the rule is that the vendor may recover compensation for his
actual loss measured by the difference between the price he was to
receive [
Footnote 2/5] (less the
amount paid) and the value of the land at the time of breach. 3
Sedgwick on Damages, 9th Ed., §§ 1023
et seq.; In re Marshall's
Garage, 63 F.2d 759. In making that valuation, the
conventional rules governing appraisals of the worth of fee
interests would be applicable. 1 Bonbright, Valuation of Property,
chs. XIII, XIV.
In sum, whatever rule of damages is applied to this situation,
the proof submitted is not adequate for appraisal of the property
interest here involved without violating the well established rule
against allowance of speculative damages, announced by this Court
on the first appeal. No reasons of policy have been suggested which
justify deviation from those well established principles. The fact
that the "lease" extends over a period of almost ten centuries
accentuates the necessity for close adherence to the rule, not for
its relaxation.
[
Footnote 2/1]
1 Bonbright, Valuation of Property, c. XII.
[
Footnote 2/2]
Bonbright,
op. cit. supra, 311
U.S. 544fn2/1|>note 1; Dewing, Financial Policy of
Corporations, pp. 319
et seq.; Graham & Dodd, Security
Analysis, c. I; Kniskern, Real Estate Appraisal & Valuation,
pp. 235
et seq.; Mason, The Street Railway in
Massachusetts, c. 6; McMichael, Long & Short Term
Leaseholds.
[
Footnote 2/3]
In the Matter of Breeze Corporations, Inc., 3 S.E.C.D. & R.
709; In the Matter of Mining & Development Corp., 1 S.E.C.D.
& R. 786.
[
Footnote 2/4]
McMichael,
op. cit. supra, 311
U.S. 544fn2/2|>note 2, c. I; Meck & Masten, Railroad
Leases and Reorganization, 49 Yale L.J. 626; Niehuss & Fisher,
Problems of Long Term Leases, 2 Mich.Bus Studies, Pamphlet 8; The
Long Term Ground Lease: A Survey, 48 Yale L.J. 1400.
[
Footnote 2/5]
Future payments would, of course, be reduced to present worth.
Bondy v. Harvey, 218 App.Div. 126, 217 N.Y.S. 877.