U.S. Supreme Court Irving Trust Co. v. A. W. Perry, Inc., 293 U.S. 307 (1934)
Irving Trust Co. v. A. W. Perry, Inc.
Argued November 5, 6, 1934
Decided December 3, 1934
293 U.S. 307
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE SECOND CIRCUIT
1. A claim based upon a covenant in a lease which provides that the filing of a petition in bankruptcy by or against the lessee shall constitute a breach of the lease, that ipso facto and without entry or other action by the lessor, the lease shall be terminated, and
that thereupon the lessor shall be entitled to damages equal to the amount of the rent reserved for the residue of the term less the fair rental value of the premises for the residue of the term, is provable in bankruptcy under §§ 1(11) and 63(a) and (b) of the Bankruptcy Act, as it was prior to the amendments of June 7 and 18, 1934. P. 293 U. S. 311 .
So held upon construction of the covenant as an agreement on the part of the tenant to pay as liquidated damages, in the event of the specified breach, an amount equal to the difference between the present fair value of the remaining rent due under the lease and the present fair rental value of the premises for the balance of the term.
2. The claim is not for rent reserved or upon the lease as such, but is one founded upon an independent express contract, and is within the very word of § 63(a)(4) of the Bankruptcy Act. Manhattan Properties, Inc. v. Irvin Trust Co., 291 U. S. 320 , distinguished. P. 293 U. S. 311 .
69 F.2d 90 affirmed.
Certiorari, 292 U.S. 620, to review a judgment reversing a judgment of the District Court which affirmed an order of the Referee in Bankruptcy disallowing a claim based upon a covenant in a lease.
MR. JUSTICE ROBERTS delivered the opinion of the Court.
The respondent was lessor in a lease having a number of years to run at the date of the tenant's bankruptcy. The writing stipulated:
". . . For the more effectual securing to the Lessor of the rent and other payments herein provided, it is agreed
as a further condition of this lease that the filing of any petition in bankruptcy or insolvency by or against the Lessee shall be deemed to constitute a breach of this lease, and thereupon, ipso facto and without entry or other action by the Lessor, this lease shall become and be terminated; and, notwithstanding any other provisions of this lease, the Lessor shall forthwith upon such termination be entitled to recover damages for such breach in an amount equal to the amount of the rent reserved in this lease for the residue of the term hereof less the fair rental value of the premises for the residue of said term."
Respondent filed a proof of claim, based upon this clause, which the referee expunged. The District Court affirmed the order. The Circuit Court of Appeals, reversing the decree of the District Court, directed that the claim should be allowed. [ Footnote 1 ] The case is here upon writ of certiorari.
Decision is to be made under §§ 1(11) and 63(a) and (b) of the Act of July 1, 1898, as they stood prior to the filing of the petition on September 30, 1932, and the presentation of respondent's proof of claim on March 29, 1933. [ Footnote 2 ] The subsequent amendments of June 7 and 18, 1934, [ Footnote 3 ] are, by their terms, inapplicable.
In Manhattan Properties, Inc. v. Irving Trust Co., 291 U. S. 320 , we reserved the question of the provability of a claim for liquidated damages arising upon such a covenant. The petitioner's contention is that, inasmuch as claims for future rent, or for damages for the breach of the covenant to pay rent, or claims upon contracts of indemnity conditioned upon reentry by the landlord subsequent to bankruptcy, were there held not provable, it logically follows that a claim for stipulated damages for
breach of the lease may not be proved. We hold otherwise.
By the terms of the contract, the filing of the petition in bankruptcy was, of itself, and irrespective of the election of lessor or lessee, a breach of the lease. The claim of the landlord consequent upon the breach arose and matured at the moment of the filing of the petition. The claim is not for rent reserved or upon the lease as such, but is founded upon an independent express contract, and hence within the very words of § 63(a)(4).
The Circuit Court construed the stipulation as an agreement on the part of the tenant to pay as liquidated damages, in the event of the specified breach, an amount equal to the difference between the present fair value of the remaining rent due under the lease and the present fair rental value of the premises for the balance of the term. The covenant is fairly susceptible of this construction. So read, the court held the clause provided a reasonable formula for ascertaining the damages of the landlord, did not smack of a penalty, and was therefore enforceable. See Wm. Filene's Sons Co. v. Weed, 245 U. S. 597 . We concur in the view that the contract, as its terms were interpreted and applied, supports a provable claim for the stipulated damages.
The judgment of the Circuit Court of Appeals is
[ Footnote 1 ]
In re Outfitters' Operating Realty Co., 69 F.2d 90.
[ Footnote 2 ]
U.S.C. Tit. 11, §§ 1 and 103.
[ Footnote 3 ]
Public No. 296 (c. 424, 48 Stat. 911) and Public No. 387 (c. 580, 48 Stat. 991), 73d Congress.