1. The provision of § 70(b) of the Bankruptcy Act that
"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"
is applicable to railroad reorganizations under § 77 of the
Bankruptcy Act. Pp.
328 U. S.
126-128.
2. The provision of § 70(b) of the Bankruptcy Act authorizing
enforcement against a bankruptcy trustee of an express covenant of
forfeiture embraces a covenant applicable to any "transfer" of the
premises "in any proceeding, whether at law or in equity or
otherwise," to which the lessee is a party, and "whereby any of the
rights, duties, and obligations" of the lessee are "transferred,
encumbered, abrogated or in any manner altered" without the
lessor's consent. P.
328 U. S.
128.
3. Whether, in a proceeding for reorganization of an interstate
railroad under § 77 of the Bankruptcy Act, enforcement against the
trustee of a covenant of forfeiture in a lease of railroad tracks
and facilities would be "consistent with the provisions" of § 77,
within the meaning of § 77(1), presents problems primarily for
consideration and decision by the Interstate Commerce Commission,
and the reorganization court should not have declared a forfeiture
of the lease until the questions had been passed upon by the
Commission. Pp.
328 U. S.
128-129.
(a) Whether the public interest requires that the line be
operated by the lessee, rather than the lessor, presents a question
for the Commission under § 1(18) of the Interstate Commerce Act. P.
328 U. S.
130.
(b) It is the function of the Commission under § 77 of the
Bankruptcy Act to prepare the plan of reorganization of the debtor
company, and, if the reorganization court decrees a forfeiture in
advance of consideration of the problem by the Commission, it would
interfere with the functions entrusted to the Commission under §
77. Pp.
328 U. S. 130,
328 U. S.
132.
150 F.2d 921 reversed.
Page 328 U. S. 124
In proceedings for the reorganization of a railroad under § 77
of the Bankruptcy Act, the reorganization court granted
respondent's motion to terminate a lease in which the debtor
company was lessee. 56 F. Supp. 187. The Circuit Court of Appeals
affirmed. 150 F.2d 921. This Court granted certiorari. 326 U.S.
707.
Reversed, p.
328 U. S. 133.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
Hoboken Manufacturers Railroad Co. (the debtor) operates a
terminal switching railroad along the waterfront at Hoboken, New
Jersey. It is a common carrier subject to the provisions of the
Interstate Commerce Act. 24 Stat. 379, 41 Stat. 474, 49 Stat. 543,
49 U.S.C. § 1. The major part of its right of way and line of
railroad is held by it under a 99-year lease from respondent dated
June 19, 1906. [
Footnote 1] In
1943, the debtor filed a petition
Page 328 U. S. 125
for reorganization under § 77 of the Bankruptcy Act, 49 Stat.
1969, 53 Stat. 1406, 11 U.S.C. § 205, in the District Court for the
District of New Jersey. The petition was approved, and petitioner
Smith was appointed trustee. Shortly thereafter, respondent
notified the trustee that it would petition the reorganization
court for termination of the lease. A hearing was held, and
decision reserved. While the matter was under advisement, the
trustee, on order of the court, adopted the lease. Thereafter, the
reorganization court granted respondent's motion to terminate the
lease, holding that the appointment of the trustee was a breach of
the terms of the lease entitling the lessor to reenter. [
Footnote 2] 56 F. Supp. 187. The
Circuit Court of Appeals affirmed. 150 F.2d 921. The case is here
on a petition for a writ of certiorari which we granted because of
the importance of the problem in the administration of the
Interstate Commerce Act and the Bankruptcy Act.
The provision of the lease upon which the forfeiture was decreed
reads as follows:
"The Lessee shall not and will not sell, assign or transfer this
lease or underlet the demised premises, or any part thereof, or the
rights and privileges, or any of them, hereby granted, without the
previous consent of the Lessor expressed by endorsement on this
lease made in pursuance of authority granted by resolution of the
board of directors of the Lessor. . . . This covenant shall also
apply to any unauthorized sale or transfer thereof or underletting
of the demised premises, or any part thereof, or of the said rights
and
Page 328 U. S. 126
privileges, or any of them, whether made by the Lessee or in any
proceeding, whether at law, or in equity or, otherwise, to which
the Lessee may be a party, whereby any of the rights, duties, and
obligations of the Lessee shall or may be transferred, encumbered,
abrogated, or in any manner altered without the consent of the
Lessor first had and obtained in the manner hereinbefore
provided."
By a further provision of the lease, violation of that covenant
entitled the lessor to terminate the lease and to reenter on
specified notice.
Sec. 77(l), 11 U.S.C. § 205(1), provides:
"In proceedings under this section and consistent with the
provisions thereof, the jurisdiction and powers of the court, the
duties of the debtor, and the rights and liabilities of creditors
and of all persons with respect to the debtor and its property
shall be the same as if a voluntary petition for adjudication had
been filed and a decree of adjudication had been entered on the day
when the debtor's petition was filed."
Sec. 70(b) of the Bankruptcy Act, 11 U.S.C. § 110(b), provides
in part:
"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."
We have recently held that those provisions of § 70(b) of the
Bankruptcy Act are applicable to reorganizations under Ch. X. 52
Stat. 885, 11 U.S.C. § 526.
Finn v. Meighan, 325 U.
S. 300. It is argued here, as it was there, that § 70(b)
should not be applied in reorganization proceedings
Page 328 U. S. 127
since reorganization plans might be seriously impaired if
forfeiture clauses in leases were allowed to be enforced. It is
contended that forfeiture of railroad leases runs counter to the
design and purpose of § 77, which is aimed at keeping railroad
properties intact so that reorganization plans may be worked out
and disintegration of transportation systems prevented. It is
argued that the policy of § 77 which prevents pledgees and
mortgagees from foreclosing their liens (
Continental Illinois
National Bank v. Chicago, R.I. & P. R. Co., 294 U.
S. 648;
Group of Institutional Investors v. Chicago,
M. St. & P. R. Co., 318 U. S. 523) is
equally applicable to prevent lessors from causing forfeiture of
leases. It is pointed out that § 77(a) gives the reorganization
court exclusive jurisdiction of the debtor and its property
wherever located. It is noted that lessors are creditors as defined
by § 77(b), and that a plan of reorganization can modify or alter
the rights of creditors either through the issuance of securities
or otherwise. § 77(b)(1). It is also pointed out that a plan of
reorganization may cure or waive defaults and may deal with all or
any part of the property of the debtor, § 77(b)(5), and may provide
for the rejection or adoption of leases. § 77(b). From these
provisions and the policy they reflect, it is argued that § 77
should not be construed as incorporating within it § 70(b).
As we have noted, § 77(l) provides that, so far as "consistent
with the provisions" of § 77, the "duties of the debtor" and the
"rights and liabilities of creditors" shall be the same as if a
voluntary adjudication had been made. We cannot say that the
forfeiture provisions of § 70(b), on their face, are inconsistent
with § 77. They embrace leases of all kinds and sorts. They include
leases of railroad tracks and facilities, but they are not
restricted to them. But, if § 70(b) is applicable to some leases
under § 77, it
Page 328 U. S. 128
would seem to be applicable to all. And termination of leases
would, in many cases, at least, be as consistent with
reorganizations of railroads under § 77 as it would with
reorganizations of other enterprises under Ch. X. Sec. 70(b) is
applicable to reorganizations under Ch. X, as we held in
Finn
v. Meighan, supra. As we pointed out in that case, an express
covenant of forfeiture has long been held to be enforceable against
the bankruptcy trustee. That represents the bankruptcy rule. And we
find no provision in § 77 which suggests that Congress intended to
make that rule inapplicable in case of railroad
reorganizations.
It is argued, however, that the covenant in the present lease is
not of the kind which is enforceable under § 70(b). In other words,
it is said not to be "an express covenant that an assignment by
operation of law or the bankruptcy" of the lessee shall "terminate"
or give the lessor "an election to terminate" the lease.
These forfeiture clauses are to be liberally construed in favor
of the bankruptcy lessee.
Finn v. Meighan, supra. Yet the
covenant in question, so construed, seems to us to fall within §
70(b). It applies to any "transfer" of the premises "in any
proceeding, whether at law or in equity or otherwise" to which the
lessee is a party "whereby any of the rights, duties and
obligations" of the lessee are "transferred, encumbered, abrogated,
or in any manner altered" without the lessor's consent. When the
trustee adopted the lease, the lessee's interest was transferred to
him.
Palmer v. Palmer, 104 F.2d 161. That transfer, being
in a § 77 proceeding, was made in a "proceeding, whether at law or
in equity or otherwise." The lessee was a party to the proceeding.
And, by the adoption, the trustee acquired such rights and
obligations under the lease as the lessee had.
But the question remains whether enforcement of the forfeiture
clause would be "consistent with the provisions"
Page 328 U. S. 129
of § 77 within the meaning of § 77(l). That question does not
seem to have been considered by the lower courts. Our view is that
it presents problems primarily for consideration and decision by
the Interstate Commerce Commission, and that the reorganization
court should not have declared a forfeiture of the lease until the
questions had been passed upon by the Commission. There are two
aspects of that problem. The first relates to abandonment of
operations by the trustee.
The District Court terminated the lease and authorized the
lessor to reenter upon the premises and to oust the debtor and the
trustee. This order followed an order of the Interstate Commerce
Commission dismissing an application made by respondent to resume
operations of the properties. The application was dismissed because
the Commission was of the view that no certificate from it was
needed. It ruled that the lessor's
"obligations and duties to the public have never ceased, but
have merely been performed by the lessee for its benefit, and, when
the latter for any reason no longer can perform such obligations,
the duties must be performed by the lessor on its own behalf."
257 I.C.C. 739, 744. And the Commission added, "If and when the
lease is terminated and the property reverts to the applicant, it
will have no alternative but to resume operation thereof."
Id., p. 744.
But that case only held that the lessor needed no certificate of
public convenience and necessity under § 1 (18) to operate the road
as, if, and when the lessee or its trustee ceased operations. It
did not present the question whether operations by the lessee or
its trustee might be abandoned. No application for abandonment of
operations by the lessee or its trustee was before the Commission.
Authority of a lessor to resume operations if the lessee or its
trustee abandons is one thing; authority of the lessee or its
trustee to abandon is quite different.
Page 328 U. S. 130
Sec. 1(18) of the Interstate Commerce Act provides in part:
". . . no carrier by railroad subject to this chapter shall
abandon all or any portion of a line of railroad, or the operation
thereof, unless and until there shall first have been obtained from
the commission a certificate that the present or future public
convenience and necessity permit of such abandonment."
In
Thompson v. Texas Mexican Ry. Co., 328 U.
S. 134, we held that a company having trackage rights
over the lines of another must receive authorization to abandon the
operations. That case is, of course, different from the present
one, because it entailed complete abandonment of operations by one
company over another's lines. Here, the question is whether the
lessee or the lessor shall perform the service. But § 1(18)
provides that "no carrier by railroad" shall abandon "the
operation" of all or any portion of a line without a certificate
from the Commission. Discontinuance of operations by the trustee is
abandonment of operations by a carrier within the meaning of §
1(18). And a certificate is required under § 1(18) whether the
lessee or the lessor is abandoning operations.
See Lehigh
Valley R. Co. Proposed Abandonment of Operation, 202 I.C.C.
659;
Norfolk Southern R. Co. Receives Abandonment, 221
I.C.C. 258. Whether the public interest requires that the line be
operated by the lessee, rather than the lessor, presents a question
for the Commission under § 1(18) of the Interstate Commerce Act.
The lessor is not at the mercy of the lessee in this situation. For
the lessor, as well as the lessee, has the standing necessary to
invoke § 1(18) on the question of abandonment.
Thompson v.
Texas Mexican Ry. Co., supra.
The second aspect of the problem is related to the first. It is
the function of the Commission under § 77 to prepare the plan of
reorganization of the debtor company.
Page 328 U. S. 131
§ 77(d). As we stated in
Ecker v. Western Pacific R.
Corp., 318 U. S. 448,
318 U. S.
468:
"These reorganizations require something more than contests
between adversary interests to produce plans which are fair and in
the public interest. When the public interest, as distinguished
from private, bulks large in the problem, the solution is largely a
function of the legislative and administrative agencies of
government, with their facilities and experience in investigating
all aspects of the problem and appraising the general interest.
Congress outlined the course reorganization is to follow. It
established standards for administration, and placed in the hands
of the Commission the primary responsibility for the development of
a suitable plan. When examined to learn the purpose of its
enactment, Section 77 manifests the intention of Congress to place
reorganization under the leadership of the Commission, subject to a
degree of participation by the court."
The Commission, in preparation of the plan, is guided not only
by the requirements that the plan be fair and equitable and
feasible. It is also charged with the duty of preparing a plan that
"will be compatible with the public interest." § 77(d). Whether a
leased line should continue to be operated by the lessee or should
revert to the system of the lessor may present large questions
bearing on the development by the Commission of an adequate
transportation system. Interstate Commerce Act, § 1. Moreover, it
appears in the present case that forfeiture of the lease will
deprive the debtor of all of its railroad properties. [
Footnote 3] Whether a particular
carrier should go out of
Page 328 U. S. 132
business presents problems of primary importance to its security
holders, and perhaps to the public interest as well. If forfeiture
of the lease is now declared, no plan of reorganization may be
possible. The problem of preparing a plan of reorganization will
often present to the Commission decisions concerning the adoption
or rejection of leases. The adoption of a lease by the trustee does
not preclude rejection of it in the plan of reorganization. §
77(b). The scheme of the Act is, indeed, to settle in the plan of
reorganization the various claims to the property. The Commission
may decide that it is in the public interest, as well as in the
interest of the private claimants, that a lease be adopted. If it
is adopted, then any defaults under it can be cured. [
Footnote 4] § 77(b)(5). Or it may conclude,
as it did in
Group of Institutional Investors v. Chicago, M.
& St. P. & P. R. Co., supra, pp.
318 U. S.
546-555, that a lease should be rejected unless the
lessor consented to a revision of its terms. Or it may conclude
that forfeiture of a lease according to the provisions of § 70(b)
would be compatible with the public interest. As we stated in
Palmer v. Massachusetts, 308 U. S. 79,
308 U. S. 87,
"The judicial process in bankruptcy proceedings under § 77 is, as
it were, brigaded with the administrative process of the
Commission."
And see Warren v. Palmer, 310 U.
S. 132. The point is that, if the reorganization court
decrees a forfeiture in advance of consideration of the problem by
the Commission, it interferes with the functions entrusted to the
Commission under § 77. Forfeiture of a lease in accordance with the
provisions of § 70(b) may be wholly consistent with the preparation
of a plan of reorganization under § 77. But, as we have said, the
nature of the
Page 328 U. S. 133
plan of reorganization to be submitted is entrusted primarily to
the Commission. If forfeiture of leases can be decreed without
prior reference of the matter to the Commission, it may be
seriously embarrassed in preparing the plan which it deems
necessary or desirable for the reorganization of the debtor.
[
Footnote 5] The federal policy
embodied in § 77 can prevent enforcement of the engagements of the
debtor pursuant to their terms.
Continental Illinois National
Bank v. Chicago, R.I. & P. R. Co., supra. Cf. Otis
& Co. v. Securities and Exchange Commission, 323 U.
S. 624.
We hold that the District Court erred in declaring the lease
forfeited, and that the judgment should be reversed and the cause
remanded. The District Court should stay its hand pending a
decision by the Interstate Commerce Commission on the
questions.
Reversed.
MR. JUSTICE JACKSON took no part in the consideration or
decision of this case.
[
Footnote 1]
The debtor has two additional pieces of land under 99-year
leases, dated June 19, 1906, from the parent company of the
respondent. By a tie-in indenture, the debtor agreed that these
leases should terminate on the expiration or earlier termination of
the main lease mentioned in the opinion. What we say in the opinion
also governs these tie-in leases.
[
Footnote 2]
Notice was also given by respondent's parent company for
termination of the tie-in leases mentioned in
note 1 supra. The order of the District
Court also terminated these leases.
[
Footnote 3]
The District Court ordered the trustee to turn over to the
respondent all of the property held or used for railroad purposes
except bank a accounts, cash, accounts receivable, and the like.
Among the property were small lengths of line which the debtor
claimed to own in fee, but which the respondent asserted should
revert to it. The order of the District Court provided that the
trustee might file a claim for that property or its value and
reasonable compensation for its use.
[
Footnote 4]
Sec. 77(b)(5) provides in part, "A plan of reorganization within
the meaning of this section . . . shall provide adequate means for
. . . the curing or waiver of defaults."
[
Footnote 5]
Finn v. Meighan, supra, involved the forfeiture of a
lease in reorganization proceedings under Ch. X. But the problem
there was not complicated by any provisions of Ch. X giving to an
administrative agency the functions entrusted to the Interstate
Commerce Commission under § 77. As we stated in
Palmer v.
Massachusetts, 308 U. S. 79,
308 U. S.
87,
". . . the whole scheme of § 77 leaves no doubt that Congress
did not mean to grant to the district courts the same scope as to
bankrupt roads that they may have in dealing with other bankrupt
estates."