R.C. Taylor Trust v. Kothe

JOHNSON, Circuit Judge. This is an appeal from a.n order of the District Court of the United States for Massachusetts. The R. C. Taylor Trust leased, April 20, 1927, to Herbert I. Turkel certain real estate for a term of two years, to begin May 15, .1927. The rent reserved was $4,000 per year payable in equal monthly payments in advance. The lease contained the following provision: “The filing of any petition in bankruptcy * * * 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 he terminated; and, notwithstanding any other provisions of this lease the Lessor shall forthwith upon such termination he 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 heieof.” Turkel afterwards was adjudged a bankrupt, but just when the petition was filed upon which adjudication was made does not appear in the record. The lessor later filed a proof of claim for damages amounting to $5,000, which was the rent reserved in the lease for the residue of the term thereof — 1 % years. The referee disallowed the claim, and upon petition for review the District Court sustained the referee and dismissed the petition. It is well-settled law in this circuit that ■a claim for rent accruing after the filing of a petition in bankruptcy is not a provable claim.- The quoted provision in the lease was clearly inserted for the purpose of enabling the lessor in the event of bankruptcy to protect itself to some extent against the [78] loss rent for the term of the lease remaining after the filing of a petition in bankruptcy. Under it the filing of a petition in bankruptcy, either by or against the lessee, was made to constitute a breach of the lease which at once was terminated. No rent could accrue after its termination. For the breach of the lease the lessor was entitled to damages. These damages are fixed as the amount of the rent reserved under the lease. The claim presented by the' lessor is therefore not for rent, but for damages to which he is entitled under this provision of the lease. The rent reserved for the balance of the term was employed by the parties to measure the damages to which the lessor was entitled. They were not dependent upon contingencies which render rent to accrue not a provable claim because not absolutely due at the time of the filing of the petition in bankruptcy. They were made absolutely payable simultaneously with the filing of the petition in bankruptcy. See Statement of Lowell, Circuit Judge, in Re Pettingill & Co. (D. C.) 137 F. 143, 146, where it is said: “For admission to proof, however, the claim need mot arise before bankruptcy, nor need the contract be broken theretofore. It is sufficient for proof if the breach of contract and bankruptcy are coincident.” Judge Putnam, in Re Swift (C. C. A.) 112 F. 315, 321, in discussing whether a claim that did not arise until the filing of a petition in bankruptcy was a provable claim, uses this language: “The contract ripened' simultaneously with the beginning of the proceedings in bankruptcy, as the consequence thereof in connection with the adjudication which followed. Of course, as everything related back to the filing of the petition, the ripening of the elaim did not occur before it was filed, nor afterwards, but simultaneously with it, as already said.” See, also, Central Trust Co. v. Chicago Auditorium Association, 240 U. S. 581, 36 S. Ct. 412, 60 L. Ed. 811, L. R. A. 1917B, 580, where the Supreme Court quotes with approval the language of Judge Lowell in Re Pettingill & Co., supra; and also In re Mullings Clothing Co. (C. C. A.) 238 F. 58, 67. It will be noted that the provision in question makes the lease to terminate and does not provide that it shall be forfeited upon the filing of a petition in bankruptcy. If forfeited it might call for some action upon the part of the lessor, but it is here provided that without any entry or action by the lessor “the lease shall become and be terminated.” It cannot be said that the amount of damages to be recovered is so largely in excess of any actual damage that the lessor may suffer that it must have been intended as a penalty and its recovery would be unconscionable. The 1 term of the lease was short — two years. While there is nothing in the record to disclose that it was necessary for the lessor to expend considerable money in the preparation of the property for the use to which the lessee might wish it devoted, it is not an unreasonable inference that it did so. It is true that if the claim is allowed it will diminish the dividends to be paid to other creditors,' but we are not concerned with this result. The only question presented upon this record is whether or not the claim made by the lessor is a provable one under section 63a(4) of the Bankruptcy Act of 1898 (11 USCA § 103 (a) (4). It is contended by the trustee that the provision above cited was intended to operate as a penalty and not to fix the amount to be paid as liquidated damages. Whether an agreement-to pay a fixed sum of money for a default in the performance of a contract is a penalty or liquidated damages depends upon the intention of the parties. Morrill v. Weeks, 70 N. H. 178, 180, 46 A. 32, and cases there cited; Sun Printing & Publishing Association v. Moore, 183 U. S. 642, 669, 22 S. Ct. 240, 46 L. Ed. 366; United States v. Bethlehem Steel Co., 205 U. S. 105, 119, 37 S. Ct. 450, 51 L. Ed. 731; Guerin v. Stacy, 175 Mass. 595, 597, 56 N. E. 892; Lynde et al. v. Thompson, 2 Allen (Mass.) 456. A well-known exception to this test is where the promise or agreement is to pay a large sum of money in the event of a default in the payment of a much smaller sum, in which case the law makes interest the measure of damages' for failure to pay money when it is due, and will not permit parties to avoid the usury laws in this way. Mead v. Wheeler, 13 N. H. 351; Morrill v. Weeks, supra. In other words, such a contract, because of the usury laws, is construed as for a penalty or security beyond which damages cannot be recovered. In the case now before us the contract or promise is not to pay a larger sum of money for a much smaller fixed sum, nor a sum as damages larger than is apparent from all the circumstances would cover actual damage; and its language plainly indicates that the parties intended that the sum agreed to be paid, in ease of a breaeh, should be liquidated damages and not a penalty. There is no evidence from which it could be found that the actual damages sustained [79] by the claimant (the lessor) were less than those agreed upon, and that those agreed upon were increased or made greater by padding those that would probably be sustained. [5] As the agreement is one for liquidated damages, can it he said to be invalid as being a fraud on the creditors of the bankrupt (the lessee), or a preferential transfer or conveyance? There was no evidence that the bankrupt intended to defraud his creditors or that tho claimant knew of such intention, if it existed. It is, therefore not void on that account. It does not appear that the bankrupt was insolvent when the lease was made; and the covenant in regard to damages, if it could be said to effect a preferential transfer, was plainly not made within four months of the filing of the petition in bankruptcy. The analogies suggested in the brief of the creditor arising in cases of leases of personal property, where by their terms tho whole amount becomes due in case of default, are not applicable to real property where, by the terms of the lease, the parties have fixed with certainty the damages to be recovered upon its breach or, what amounts to tho same thing, determined the method of their certain ascertainment. The decree of the District Court is reversed, and the case is returned to that court for further action not inconsistent with this opinion, the appellant to recover costs to. bo paid from the assets of the bankrupt.