1. Section 70(b) of the Bankruptcy Act as amended, which § 102
makes applicable to proceedings under Chapter X, authorizes
enforcement of an express covenant providing for termination of the
lease upon approval of a petition under Chapter X for
reorganization of the lessee. P.
325 U. S.
302.
2. A provision of a lease authorizing forfeiture "if the tenant
shall be adjudged bankrupt or insolvent by any Court"
held
operative upon approval of a petition for reorganization of the
tenant under Chapter X of the Bankruptcy Act. P.
325 U. S.
303.
3. Since the covenant here provides for forfeiture upon an
adjudication of insolvency "by any Court," it is not to be
construed as limited to an adjudication of insolvency by New York
courts under the Debtor and Creditor Law. P.
325 U. S. 304.
146 F.2d 594 affirmed.
Certiorari, 324 U.S. 834, to review the affirmance of an order
in a proceeding under Chapter X of the Bankruptcy Act adjudging the
termination of a lease held by the debtor.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
Childs Company operates a chain of restaurants. In August, 1943,
it filed a voluntary petition for reorganization under Ch. X of the
Bankruptcy Act, 52 Stat. 885, 886, 11 U.S.C. §§ 526, 530, alleging
that it was unable to pay its debts as they matured. The petition
was approved,
Page 325 U. S. 301
and petitioner was appointed trustee of the debtor. Childs
Company had been lessee of, and had operated a restaurant on,
certain premises in New York City for over forty years. Its present
lease is for a term of twenty-one years, ending in 1947. That lease
contains the following provision:
"The tenant covenants that . . . if a petition in bankruptcy
shall be filed by the tenant or
if the tenant shall be adjudged
bankrupt or insolvent by any Court, or if a trustee in
bankruptcy of the tenant shall be appointed in any suit or
proceeding brought by or against the tenant, then, and in each and
every such case, the term hereby granted shall immediately cease,
determine, and come to an end, and the landlord may recover and
resume possession of the demised premises by any legal means."
(Italics added.)
In May, 1944, petitioner advised the lessor that it desired to
assume the lease. Respondent replied that the lease had ceased and
come to an end by virtue of the bankruptcy proceedings. Thereafter,
respondent petitioned the bankruptcy court for an order adjudging
that the term granted by the lease had terminated. The court
granted the relief asked by the petition. The Circuit Court of
Appeals affirmed. 146 F.2d 594. The case is here on certiorari.
The bankruptcy court does not look with favor upon forfeiture
clauses in leases. They are liberally construed in favor of the
bankrupt lessee so as not to deprive the estate of property which
may turn out to be a valuable asset.
Gazlay v. Williams,
210 U. S. 41;
Model Dairy Co. v. Foltis-Fischer, Inc., 67 F.2d 704, 706.
But an express covenant of forfeiture has long been held to be
enforceable against the bankruptcy trustee.
Empress Theater Co.
v. Horton, 266 F. 657;
Jandrew v. Bouche, 29 F.2d
346. And the 1938 revision of the Bankruptcy Act made no change in
that regard. Congress granted the trustee sixty
Page 325 U. S. 302
days (unless reduced or extended) in which to assume or reject a
lease. § 70(b) of the Bankruptcy Act as amended, 11 U.S.C. §
110(b). But, at the same time, Congress provided:
"A general covenant or condition in a lease that it shall not be
assigned shall not be construed to prevent the trustee from
assuming the same at his election and subsequently assigning the
same, but an express covenant that an assignment by operation of
law or the bankruptcy of a specified party thereto or of either
party shall terminate the lease or give the other party an election
to terminate the same shall be enforceable."
This provision was merely declaratory of the law as it then
existed. [
Footnote 1]
There is some suggestion, however, that that provision is
applicable only in ordinary bankruptcy proceedings, and not to
reorganizations under Ch. X. It is pointed out that frequently the
value of enterprises is greatly enhanced by leases on strategic
premises, and that, if forfeiture clauses were allowed to be
enforced, reorganization plans might be seriously impaired. But
Congress has made the forfeiture provision of section 70 applicable
to reorganization proceedings under Ch. X. By § 102 (11 U.S.C. §
502), it provided that the provisions of Ch. VII (which includes §
70) should be applicable to proceedings under Ch. X "insofar as
they are not inconsistent or in conflict with the provisions" of
that chapter. [
Footnote 2]
Moreover, Congress provided in § 102, that
"provisions relating to 'bankrupts' shall be deemed to relate
also to 'debtors,' and 'bankruptcy proceedings' or 'proceedings in
bankruptcy' shall be deemed to include proceedings under this
chapter. "
Page 325 U. S. 303
Thus, we must read § 70(b), as providing that an express
covenant is enforceable which allows the lessor to terminate the
lease if a petition to reorganize the lessee under Ch. X is
approved.
Cf. In re Walker, 93 F.2d 281. That being the
policy adopted by Congress, our duty is to enforce it.
The question remains whether this lease should be so construed.
There is to be a forfeiture "if the tenant shall be adjudged
bankrupt or insolvent by any Court." It is said that "insolvent" is
used interchangeably with "bankrupt." But it has long been held
that a general assignment is an act of bankruptcy whether or not
the debtor is insolvent.
West Co. v. Lea, 174 U.
S. 590. Thus, it would seem that "adjudged bankrupt" and
"adjudged insolvent" do not cover precisely the same ground.
Moreover, insolvency in the equity sense has always meant an
inability of the debtor to pay his debts as they mature. [
Footnote 3] Under the Bankruptcy Act,
it means an insufficiency of assets at a fair valuation to pay the
debts. § 1 (19), 11 U.S.C. § 1 (19). It was long the practice to
initiate reorganizations in the federal equity courts by the filing
of a general creditor's bill which alleged insolvency in the equity
sense. [
Footnote 4] There would
accordingly seem to be no doubt that, if a receiver were appointed
pursuant to such a bill, it would bring into operation an express
covenant providing for a forfeiture of a lease "if the tenant shall
be adjudged insolvent by any Court." No reason is apparent why the
same result should not obtain in cases of reorganization under Ch.
X.
We do not believe a different result is indicated in this case
merely because the provision for forfeiture on adjudication
Page 325 U. S. 304
of insolvency appears in a paragraph otherwise exclusively
devoted to the contingency of bankruptcy. Petitioner relies on the
New York Debtor and Creditor Law, Consol.L., c. 12, which provides
for the discharge of insolvent debtors in proceedings in the New
York courts. §§ 50-88. It is said that insolvency under that
statute means insolvency in the bankruptcy sense, § 52, and that
the covenant in question was drawn so as to provide for a
forfeiture in the event of such an adjudication. But, as we have
said, the covenant in this lease provides for forfeiture on an
adjudication of insolvency "by any Court." It is difficult to see
in that language a limitation of the covenant to an adjudication of
insolvency by the New York courts under the Debtor and Creditor
Law. [
Footnote 5]
Affirmed.
[
Footnote 1]
See 4 Collier on Bankruptcy (14th Ed.1942), pp.
1239-1241; Weinstein, The Bankruptcy Law of 1938, p. 159.
[
Footnote 2]
And see §§ 114 and 115. As respects the rejection or
assumption of leases under Ch. X,
see §§ 116(1), 202,
216(4).
Cf. In re Chase Commissary Corp., 11 F. Supp.
288.
[
Footnote 3]
Glenn, Creditors' Rights and Remedies (1915) § 370.
[
Footnote 4]
In re Metropolitan Railway Receivership, 208 U. S.
90; 1 Gerdes, Corporate Reorganizations (1936) §§ 13,
19. Part VIII, Report on the Study and Investigation of Protective
and Reorganization Committees, Securities and Exchange Commission
(1940), pp. 24
et seq.
[
Footnote 5]
The other provisions of New York law dealing with insolvency
commonly define it as an inability to pay debts as they mature. The
New York authorities are reviewed by Judge Knox in
In Re
Schulte Retail Stores Corp., 22 F.
Supp. 612, 616.