Tipton v. Irving Trust Co.

AUGUSTUS N. HAND, Circuit Judge. The petitioners herein are landlords who seek to prove a claim in bankruptcy arising out of the alleged breach of a covenant in a lease made by them to F. & W. Grand 5-10-25 Cent Stores since adjudicated a bankrupt. This lease was of certain land and buildings in Los Angeles, Cal., and was for the term of fifty years commencing May 1, 1931, and. continuing to April 30, 1981. The tenant was to pay a specified rent monthly and also taxes accruing during the term. In subdivision IV the lease contained a covenant that “upon delivery of possession” to the lessee it would “within one (1) year from the date it receives possession * * * commence to remodel, alter and/or add to the present building * * * and * * * expend in such work not less than the sum of Sixty Thousand Dollars; * * * or, at Lessee’s sole option, * * * within said period of time * * * build and constxixct a new building * * * to cost not less than the sum of Sixty Thousand Dollars” and would “complete' said remodelling, altering and reeonditkming of said premises, or, if it elects to erect a new building, * * * complete said new building not later than two (2) years from the date it receives possession. * * * ” On May 1, 1931, the lessee entered into actual possession of the demised premises except for a portion thex’eof occupied by Van de Kamp Bakexry, which was in possession of a building thex’eon under a lease from the owners subject to which the lease to F. & W. Grand 5-10-25 Cent Stores was made. The latter did not begin to remodel the existing building or to erect a new building on the demised premises during the year succeeding the iixeeption of its lease on May 1, 1931, and on July 14, 1932, a petition in bankruptcy was filed against it under which it was thereafter adjudicated a bankrupt and Irving Trust Company became its trustee. The lease to Van de Kamp Bakery expired June 30, 1931, but the latter had a privilege of renewal for five years, which it exercised, so that its lease as renewed would expire June 30, 1936. All the rights of the landowners in the Van de Kamp Bakery lease were assigned to F. & W. Gx*and 5-10-25 Cent Stores, and the latter agreed to “accept possession * * * subject to the tenancy * * * of the Van de Kamp Bakery” and “to the extension of the term thereof should the same be extended for said five (5) year period. * * ” Subdivision XXIII-A of the main lease provided that the Van de Kamp Bakery lease contained a covenant that if the lessor therein wished to ex-ect a xxew building on the demised premises it might cancel the lease at any time after July 1, 1931, upon giving a ninety-day written notice, and, if this were done and Van de Kamp Bakery failed to give up possession, the time of their fux*ther occupancy should be added to the time within which the F. & W. Grand 5-10-25 Cent Stox*es should be. obliged to commence the construction of a new building on the premises demised to them. It is contended by the trustee in bankruptcy that the breach of the covenant to remodel or rebuild had not accrued prior to the filing of the petition in bankruptcy and therefore there was no breach for which the appellants could file proof of claim. The trustee says this is so because, if F. & W. Grand 5-10-25 Cent Stores wished to erect a new building on the premises they had to dispossess Van de Kamp Bakery and, by the terms of the latter’s lease, this could not be done prior to ninety days after July 1,1931, [47] or October 1, 1931, and therefore one year from “delivery of possession” within which the tenant had to begin work would not expire until October 1, 1932. But we do not regard this contention as sound. There is nothing in the lease which indicates that the “delivery of possession” (referred to in Subdivision IV) from which time to commence remodeling or rebuilding is to run means delivery of physical possession of every part of the demised premises. The lease was made subject to the existing tenancy of Van de Kamp Bakery, all rights under which were assigned to F. & W. Grand 5-10-25 Cent Stores. The possession which set the time running was clearly a possession subject to the outstanding lease. The only thing which might extend the time was the holding over of Van de Kamp Bakery after a bona flde attempt had been made to remove them by giving the ninety days’ notice, and no such notice aves given. Ilad it been given promptly, the tenant Avould have had seven months left before May 1, 1932, Avithin Avhieh to commence the Avork of rebuilding, and, if the bakery did not remove, as required, such further time as it remained Avrongfully in possession. No steps were taken to exercise an option to rebuild and remove the hakery for the purpose of carrying out such a plan. Likewise nothing was done to exercise the option to remodel, and the lease contained no provision for extending the year Avithin which Avork was to commence if that option Avere chosen. Up to the time when the petition in bankruptcy aves filed, nothing had been done toAvard either remodeling or rebuilding. Accordingly a breach of the covenant in subdivision IV took placo prior to the time Avhen bankruptcy occurred. The breach, however, was not in failing to completo remodeling or rebuilding and to expend $60,-000 thereon, but in neglecting to begin such Avork within the year succeeding May 1, 1931. Oil May 23,1932, the landlords notified F. & W. Grand 5-10-25 Gent Stores, and its receivers in equity, that it was in default for failing to pay the monthly installments of rent due April 1, 1932, and May 1, 1932, and the taxes due April 20,1932, and for failing to begin to remodel or rebuild on or before May, 1932, and stated that the landlords intended to re-enter and assume control of the premises and to hold the tenant “liable for all loss resulting from its abandonment of the * * ‘‘ lease.” We are not told whether the landlords actually re-entered or not, but, irrespective of this, we think that a covenant in a lease that a tenant shall improve the demised premises when it is not necessarily to bo performed prior to the filing of a petition in bankruptcy cannot serve as the basis for a proof of claim. If the tenant had chosen to rebuild and had begun just before May 1, 1932, little more than the demolition of the existing building could have been accomplished and its removal, and nothing more, would have done the landlords more harm than good. If, on the other hand, the tenant had started to remodel the existing building just before the year expired, though acting within its rights, it would have conferred no appreciable benefit upon the owners of the property who are seeking to prove a claim based upon alleged damages because of failure to do this very thing. The breach of the covenant to improve the demised premises can only serve as the foundation for a proof of claim to the extent that damages flowed from a failure to perform before July 14, 1932, AA'ben the petition in bankruptcy was filed. If the landlords had sued on July 14, 1932, for breach of covenant to begin work before May 1, of that year, the damages would have been wholly speculative and illusory. Damages for broach of the covenant to complete work which did not have to be fully performed before May 1, 1932, were not a fixed liability absolutely owing at the time of the filing of the petition and not, in our opinion, provable when arising out of a lease of land. Bankruptcy Act, § 63 (11 USCA § 103); Manhattan Prop. v. Irving Trust Co., 291 U. S. 320, 54 S. Ct. 385, 78 L. Ed. 824. It is true that the bankruptcy of the tenant is an anticipatory breach, but a claim for a breach of a covenant to improve demised premises except so far as damages accrued prior to bankruptcy is of the nature of claims for future rents, or for restoration of premises, or for payment of all future rents at the termination of the lease Avhieh have been held nonprovable. Manhattan Prop. v. Irving Trust Co., 291 U. S. 320, 54 S. Ct. 385, 78 L. Ed. 824; Wright v. Irving Trust Co. (C. C. A.) 70 F.(2d) 245; In re F. & W. Grand 5-10-25 Cent Stores (Possart v. Irving Trust Co.) 69 F.(2d) 807, 808 (C. C. A.); In re Schulte-United, Inc. (D. C.) 2 F. Supp. 285. We are all the more reconciled to the foregoing conclusion because the building which, under the lease, Avas to be restored or rebuilt Avould not have passed to the landlords for fifty years had the lease been ful [48] filled, so that its present worth would in any event have been very slight. The order expunging the claim is affirmed.