In Re Schulte Retail Stores Corporation ( 1937 )

KNOX, District Judge.

This is a proceeding on exceptions to a report of a special master. In 1920, D. A. Schulte, Inc., entered into a lease with George W. Walker, now deceased, covering certain premises at the southeast corner of Broadway and 104th street, New York City. A provision of the lease is as follows: “XVII. — if the said party of the second part, its successors or assigns shall at any time during the term hereby demised or of the renewal term as herein provided, become insolvent, or if proceedings in bankruptcy shall be instituted by or against said party of the second part, its successors or assigns, or if it or they shall compound its or their debts or assign over its or their effects for payment thereof, or if any judgment be entered, or if any execution of judgment shall issue, or if any attachment be levied against it or them, or any of its or their effects whatsoever whereupon the said demised premises shall be taken or attempted to be taken or if a receiver shall be appointed of its or their property, and the said Tenant, its successors, or assigns, does not in the case of said proceedings in bankruptcy, or the appointment of such receiver or of the entry of such judgment, or the issue of such execution or attachment within ninety days thereafter, cause the same to be discontinued, discharged, removed or vacated, or bond the same it shall and may be lawful for the Landlord, his heirs or assigns, at his or their election into and upon the said demised premises or property or any part thereof, in the name of the whole to enter and the same to have, hold, repossess and enjoy as of his or their former estate, discharged from these presents and the demise intended to be hereby made as aforesaid, anything herein contained to the contrary thereof in any wise notwithstanding.”

A substantial portion of the premises have been sublet by D. A. Schulte, Inc., at the same monthly rental which Schulte was required to pay the landlord.

On June 3,-1936, Schulte’s petition under section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, was approved. The debtor, by order of‘this court entered June 30, 1936, was continued in possession. Since the filing of the petition, the debtor has continued to make payment to the landlord of an amount equal to the rent reserved under the lease. On October 1, 1936, the landlord moved for an order permitting it to prosecute dispossess proceedings against the tenant. The matter was referred to a special master and, in due c.ourse, he decided that debtor in the course of precipitating the proceedings in 77B had brought itself within the terms of paragraph XVII of the lease. He further decided that the landlord, by accepting the payments subsequent to June 3, and more particularly, the payments on September 3 and October 3, had waived the forfeiture privilege of paragraph XVII. The petitioners have appealed from the master’s decision.

In his decision the master stated: “When all of the allegations of the petition are read together, it appears to me that the debtor admitted its inability to meet its debts in full as they mature. This is an admission of insolvency under the Law of the State of New York, although it is not insolvency in the bankruptcy sense. Upon the hearing I expressed the view that this is not the insolvency provided for in the above quoted provision of the lease. However, upon further deliberation I am constrained to hold that the provision giving rise to a forfeiture upon insolvency of the tenant does contemplate insolvency under the Law of the State of New York.”

The debtor has not contested the master’s conclusion on this point, and to that extent I am satisfied to accept his conclusion. However, I am unable to agree with his finding that the landlord waived its rights under the aforestated paragraph.

Waiver' is a legal conclusion attached to a factual situation. Sometimes certain acts are deemed to result in a waiver of rights notwithstanding the mental reservations which may accompany such acts. In this case, petitioners, three months after the inception of these proceedings, could have declared the lease at an end and moved to oust the lessee; or they could have waived the breach and permitted the lease to continue. Having had three months in which to arrive at a decision as to. the action to be taken in respect to the lease, and having determined to re-enter, arid notwithstanding the institution of proceedings looking to that end, petitioners accepted a payment from the lessee that was equal to the rent for October. Such acceptance has generally been held, in relation to a breach giving the lessor the right to re-enter, to be a waiver of such right. See Woollard v. Schaffer Stores Company, 272 N.Y. 304, 5 N.E.2d 829, 109 A.L.R. 1262, and cases cited therein.

But the situation in which these parties then found themselves was complicated by the applicability thereto of their respective rights and obligations arising under the provisions of 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. The debt- or was entitled to a more or less indefinite period within which to apply to the court for an order affirming or rejecting the lease. Pending such application, the debt- or had possession and use of the premises under the protective arm of the court. Whether the affirmation or rejection of the lease shortld come about, pursuant to section 77B(c) (5) of the act, 11 U.S.C.A. § 207(c) (5), the estate of the debtor, in one form or another, would be liable for the use of the premises from the date on which the petition in reorganization was approved. If the lease were affirmed, the liability would be considered as one for rent; if the lease were rejected, the liability would be for use and occupancy, viz., the reasonable value of the use of the premises which, in turn, would probably be the rent specified in the lease. Irrespective of the legal characteristics of the liability, it would be recognized as an expense of reorganization and, as such, it would enjoy priority over claims that accrued prior to the inception of these proceedings.

The cases hold that the status of a debtor in possession is analogous to that of a receiver in equity. In re Avorn Dress Company, 2 Cir., 79 F.2d 337; In re Chase Commissary Corporation, D.C., 11 F.Supp. 288. In the latter case, Judge Patterson outlined the relationship of a lessor and a lessee under a lease existing upon the institution of an equity receivership and then proceeded to hold that the same outline applies to an estate in the course of reorganization under section 77B, whether in custody of a trustee or of the debtor itself.

In the light of Judge Patterson’s decision, with which I am in accord, it seems both a logical and inevitable conclusion that the case falls within and is controlled by Model Dairy Company v. Foltis-Fischer, 2 Cir., 67 F.2d 704. In that case, as here, the receiver had not yet affirmed or rejected the lease; in that case, as here, certain payments were accepted by the landlord after the breach. True, the payments there were denominated for “use and occupancy,” but a waiver of rights cannot be made to depend upon terminology alone. Until the affirmance of the lease upon the part of the debtor, the lessor was as much entitled to regard them as payments for use and occupation, as to look upon them as installments of rent. While, in a reorganization proceeding, the debt- or must be given reasonable time and opportunity to put its house in order during its surcease from the demands of creditors, it must fairly requite the owner of the facilities upon which it depends for sustenance.

When property of a debtor is thus put to the use of a distressed debtor, and the price of its use is capable of being called either rent or a payment for use and occupation, it should not lie wholly within the power of the debtor to make choice of the denominating quality. The debtor is the agent of the court which is supposed to protect the creditors and other parties in interest as well as the debtor. Hence, I believe, in the absence of clear and convincing proof that the lessor intended to waive the breach in the lease, -it should not be considered as having done so. The special master’s report, to the extent indicated, is overruled and the petitioners’ request is granted.