Empress Theatre Co. v. Horton

266 F. 657, 1920 U.S. App. LEXIS 1737

• Court: Court of Appeals for the Eighth Circuit
• Decided: July 15, 1920
• Docket: No. 5543
• Status: Published

Opinion

SANBORN, Circuit Judge

(after stating the facts as above). [ 1 ] If a lessor, for a gross consideration received by him at the time the lease is made, leases the valuable basement of a city building for a specific use free of subsequent rent for 15 years on the condition that in case of the insolvency or bankruptcy of the lessee, the term of the lease shall, at ,the election of the lessor, then terminate, the lease shall be forfeited, the lessor may take, and the lessee will deliver back to him, immediate possession of the leased premises, and no right, title, or interest shall pass to the trustee in bankruptcy of the lessor; if the lessee expressly covenants in the lease that, if any condition or agreement in the lease on his part is not fully complied with and performed, the lessor may terminate the lease and retake, and the lessee will deliver to him, immediate possession of the leased premises; if the lessee becomes insolvent and is adjudged bankrupt, if the lessor immediately elects then to terminate the term of the lease, to forfeit it, and to take possession of the premises on account of such insolvency and bankruptcy; if he gives due notice of his election and demands immediate possession of the premises — then may a court of chancery at the instance and on the prayer of the trustee in bankruptcy of the lessee, in the absence of any fraud or wrong of the lessor, and of mistake or accident, decree under the recognized principles and rules of equity jurisprudence that the condition and covenants of the lease recited be avoided and nullified, that the specific or other performance thereof'be perpetually enjoined, and that the lessor, without receiving any equitable consideration therefor, be forever deprived of the use and the value of the use of the leased premises from the time of the insolvency and bankruptcy to the end of the 15 years? This is the question which this case presents. The contingencies of the question are the established facts here, and the referee and the District Court have answered it in the affirmative. It seems difficult, however, to find among the principles and rules of equity any sound basis for this conclusion.

A court of equity may enjoin libe performance of and set aside contracts, conditions, and covenants obtained by the fraud, deceit, or wrong of the respondent, but neither the Empress Theatre Company nor its predecessor in interest was guilty of fraud, wrong, or deceit. It may sometimes avoid conditions and covenants for mistake or accident, but there was neither in this case. The condition and covenants of the lease were natural, reasonable, and just. It clearly shows that when it was made the lessor and the lessee contemplated the possible, perhaps the probable, insolvency and bankruptcy of the lessee and of some of its successors in interest during the long 15 years then to come, discussed, carefully considered, and finally contracted and wrote into their lease their agreement what the effect of such insolvency and bankruptcy should be, to wit, the end of the term of the lease, its forfeiture, and the return to the lessor of the leased premises at its election. The basement leased was a valuable property. The purpose the lessor had in making the lease, to secure the operation in this basement of a high-class café with special amusement features, made the solvency of the lessee and hence its continuous operation of the ,cafc essential to the accomplishment of this purpose. Its insolvency or bankruptcy, placing the basement in the hands of a trustee for a long time during bankruptcy proceedings, and then sending it to an unknown purchaser, would undoubtedly to a large extent defeat the object of the lessor in making tiie lease, produce the vacancy or inadequate operation of the proposed café, and result in immeasurable damage to the leased premises and to the value of their use. It was to prevent this contemplated possibility that these parties wrote into their lease the condition and covenant that in case of the insolvency or bankruptcy of the lessee, at the election of the lessor, the term of the lease should end and the leased premises should be returned to the lessor free from the lease.

Nor was this an unconscionable or inequitable agreement. The lessor received and the lessee gave for this lease $42,000 of the corporate stock of the latter. The lessee received and the lessor gave the use of the basement for the term of 15 years on condition that the lessee or its successor in interest, approved by the lessor, remained solvent for 15 years, but that it should be terminable at the option of the lessor at any time within the 15 years when the lessee became insolvent or bankrupt. When the lease was made, the effect of the condition and covenants which the parties undoubtedly then contemplated was that, in case the lessee became insolvent or bankrupt, its $42,000 of stock which the lessor received would be worthless, and it would actually receive nothing for the lessee’s use of the premises, the lessee’s operation of the café would be so financially disastrous that it would, at its insolvency, have exhausted the lessee’s means and rendered it incapable of operating or using the premises as a café, and the lessor would have the right then to end the term of the lease and take back the leased premises. And such was the actual 'effect of the condition and covenants of the lease in about a year from the commencement of the lessee’s operation under it, when it became insolvent and bankrupt. So it was that each party at the making .of the lease foresaw the possibility, perhaps the probability, of the insolvency and bankruptcy of the lessee, agreed that the effect of such insolvency and bankruptcy should be to vest in the lessor the right at its election then to end the term of the lease and take back the premises, and then took its chance of such insolvency and bankruptcy and signed the' lease. And, as the condition and covenants under consideration were in the lease, every one who has succeeded to any interest in or lien upon any interest in the lease has taken that interest or lien under and subject to that condition and those covenants, and has taken its or his chance of the insolvency or bankruptcy of the original or successor lessee thereunder.

Nor was there anything in the condition and covenants of this lease evil in itself, or prohibited by law, or contrary to the public policy of state or nation.. The condition and covenants were not novel, but common provisions in leases. Conditions and covenants in leases of the same character have been repeatedly considered, and generally, nay almost universally, sustained and enforced, both by courts of equity and courts.of law. Kann v. King, 204 U. S. 43, 54, 63, 27 Sup. Ct. 213, 51 L. Ed. 360; In re Georgalas Bros. (D. C.) 245 Fed. 129, 131, 132; Galbraith v. Wood, 124 Minn. 210, 212, 213, 215, 216, 144 N. W. 945, 50 L. R. A. (N. S.) 1034, Ann. Cas. 1915B, 609; In re Frazin, 183 Fed. 28, 29, 105 C. C. A. 320, 321, 33 L. R. A. (N. S.) 745; Lindeke v. Associates Realty Co., 146 Fed. 630, 632, 636, 639, 641, 77 C. C. A. 56, 58, 61, 64, 66; Brewster v. Lanyon Zinc Co., 140 Fed. 801, 813, 815, 816, 817, 818, 72 C. C. A. 213, 225, 227, 228, 229, 230; Towle v. Pullen, 238 Fed. 107, 110, 112, 151 C. C. A. 183, 186, 188; Liggett Co. v. Wilson, 224 Mass. 456, 113 N. E. 184, L. R. A. 1917A, 205; White v. Huber Drug Co., 190 Mich. 212, 157 N. W. 60, 61, 63; Hepp Co. v. Deahl, 53 Colo. 274, 125 Pac. 491; Negaunee Iron Co. v. Iron Cliffs Co., 134 Mich. 264, 96 N. W. 468, 472; Klein v. Insurance Co., 104 U. S. 88, 92, 26 L. Ed. 662; Westbrook v. Schmaus, 51 Kan. 558, 559, 560, 33 Pac. 306.

In Kann v. King, 204 U. S. 43, 57, 27 Sup. Ct. 213, 51 L. Ed. 360, the lessee in a lease, whereby she was bound to pay the taxes every year, and the right of the lessee to terminate the lease and re-enter for breach of any of the conditions thereof was stipulated therein, brought a suit in equity against the lessor to enjoin the latter from maintaining landlord and tenant proceedings to recover possession of the premises, based upon the lessor’s right of re-entry which had arisen from the failure of the lessee to pay the taxes. The Supreme Court first held that there was “no foundation for the contention that it was within the ordinary power of a court of equity to relieve from the forfeiture,” then proceeded “to consider whether the case as made by the-record is brought within the general authority of a court of equity to relieve in cases of fraud, accident or mistake”- (204 U. S. 57, 27 Sup. Ct. 217, 51 L. Ed. 360), found no proof of accident or mistake, or of fraud or wrongdoing on the part of the lessor, reversed the decree against her, which had been rendered below, and directed the dismissal qf the bill for want of equity.

The Circuit Court of Appeals of the Second Circuit in In re Frazin, 183 Fed. 28, 29, 32, 105 C. C. A. 320, 33 R. R. A. (N. S.) 745, had a case in which a paragraph of the lease before it was identical in effect and nearly so in words with the provisions of the lease in hand regarding the rights of the lessor in case of bankruptcy of the lessee and the appointment of a receiver or a trustee in bankruptcy. There, as here, the trustee in bankruptcy of the estate of the lessee applied to the District Court in the bankruptcy case for and obtained an order which prohibited the lessor from re-entering the leased premises by reason of the breach of the condition .and covenants of the lease on this subject. The lessor filed a petition in the Circuit Court of Appeals to revise this order. That court heard and considered the question on its merits and reversed the order of the District Court, with costs. To the same effect was the decision of the District Court as to the rights of the lessor under a like condition and covenant with reference to the effect of the bankruptcy of the lessee in In re Georgalas Bros. (D. C.) 245 Fed. 129, 131, 132.

In Galbraith v. Wood, 124 Minn. 212, 213, 215, 216, 144 N. W. 945, 50 L. R. A. (N. S.) 1034, Ann. Cas. 1915B, 609, the parties made a lease of a hotel for a term of 15 years; that lease provided that, if the lessee should be declared bankrupt or insolvent, the lessors might declare the term ended, re-enter the premises, take and hold them. When the lease was made the lessee paid to the lessor $20,000 on account of the rent for the third, fourth, and fifth years of the 15-year term. About 5 months after the making of the lease, the lessee was adjudged bankrupt, and the plaintiff was appointed his trustee in bankruptcy. On the same day the lessors gave notice to the lessee and trustee that they declared the lease ended, because the lessee was adjudged a bankrupt, and demanded possession of the premises. The trustee surrendered them, and sued the lessors for the $20,000 that the lessee had paid to them on the rent for the third, fourth, and fifth years of the term. The Supreme Court of Minnesota held that under the terms of the lease the lessors had the right to declare its term ended (124 Minn. 212, 215, 216, 144 N. W. 945, 50 L. R. A. [N. S.] 1034, Ann. Cas. 1915B, 609) and to re-enter and take possession of the premises, and that the trustee could not recover the $20 000

In Brewster v. Lanyon Zinc Co., 140 Fed. 801, 813, 815, 816, 817, 818, 72 C. C. A. 213, Judge Van Devauter (now Mr. Justice Van Devanter of the Supreme Court) delivered the opinion of this court upon the turning points in the case in hand. In that case the lessor In an oil and gas lease brought a bill in equity against the lessee for a decree that the term of the lease was ended, that he was entitled to the immediate possession of the leased premises, that the lease was thenceforth void, and that it and its record be annulled, because the lessee had failed to perform its implied covenants in the lease to continue, after the first 5 years of the term thereof, with reasonable diligence, the work of exploration, development, and production, and the lessor had notified the lessee that she elected to declare the lease void, and had demanded a surrender and cancellation thereof under the provision therein that “a failure of second party to comply with any of the above conditions renders this lease null and void.” The District Court had dismissed the bill on a demurrer for want of equity. This court held: That there was no express, but that th'ere was an implied, covenant in the lease on the part of the lessee to continue the exploration and development with reasonable diligence after the expiration of the first 5 years. That a covenant of that character was a condition of the lease, the breach of which entitled the lessor to avoid it (140 Fed. 812, 813, 815, 72 C. C. A. 213). To the same effect are Liggett v. Wilson, 224 Mass. 456, 113 N. E. 184, L. R. A. 1917A, 205; Gilchrist v. Foxen, 95 Wis. 428, 70 N. W. 585; Knutson v. Bostrak, 99 Wis. 469, 75 N. W. 156; Glocke v. Glocke, 113 Wis. 303, 89 N. W. 118, 122, 123, 57 L. R. A. 458). That, while relief against forfeitures may be granted where, as in failures to pay on time fixed money rents or installments of the purchase price of lands, damages from the breach are certain, and adequate compensation may be made, such relief is never granted where the damages from the breach because of which the forfeiture is incurred cannot be ascertained with reasonable certainty (140 Fed. 816, 72 C. C. A. 213). To the same effect are 1 Pomeroy’s Equity Jurisprudence (4th Ed.) § 454; Geffert v. Geffert, 97 Kan. 57, 157 Pac. 384; Liddle v. Cook, 209 Fed. 182, 126 C. C. A. 130; Klein v. Ins. Co., 104 U. S. 88, 92, 26 L. Ed. 662; Westbrook v. Schmaus, 51 Kan. 558, 559, 560, 33 Pac. 306; Towle v. Pullen, 238 Fed. 107, 110, 111, 151 C. C. A. 183. That there is no insuperable objection to the enforcement of a forfeiture by a court of equity, and, when that is more consonant with the principles of right, justice, and morality than to withhold relief, or when there is full, clear, and strict proof of a legal right to a forfeiture, equity follows the law and enforces it (140 Fed. 819, 820, 72 C. C. A. 213). To the same effect are Brown v. Vandergrift, 80 Pa. 142, 148; Cherokee Const. Co. v. Bishop, 86 Ark. 489, 112 S. W. 189, 190, 192. 194; Negaunee Iron Co. v. Iron Cliffs Co., 134 Mich. 264, 96 N. W. 468, 472; Reach v. Reach, 4 Ind. 628, 629, 58 Am. Dec. 642. And this court reversed the dismissal of the bill and directed the court be.low to proceed to hear, determine, and adjudge the case in accordance with these rules.

[2] In view of the facts and decisions which have now been reviewed, why should the covenants of the lessee and the condition of the lease in hand be avoided, their performance prohibited, and the lessor deprived of the use of the leased premises that their terms assure to him? Counsel for the trustee of Philbin’s estate answer, because it would be harsh and unconscionable not to do so. They say that, when Philbin bought the lessee interest in the lease, it provided that the lessee should have the use of the premises, rent free, for the remainder of the 15 years, which was about 8 years; that he paid to his assignor McGilton $9,000 for that use; that the trustee is now offered $12,000 for this use, if the court 'will avoid the condition of the lease and the covenants of the lessee, and adjudge it to him exempt therefrom; and that for the benefit- of the creditors of Philbin a court of equity ought so to do. All the rights and interest of the creditors of Philbin, if any, are derived from him. Against the lessor neither the trustee nor any creditor of Philbin has any greater right or interest in the leased premises or the lease than Philbin has, and the contentions of counsel in their behalf will therefore be discussed under his name. It- is true that, when Philbin bought the "lessee interest, the lease provided that the lessee should have the use of the premises, rent free, for the remainder of the term, but only on the condition that, if the lessee became insolvent or bankrupt, the lessor might at its election end the term of the lease and the lease itself, and take immediate possession of the premises free therefrom. Philbin bought subject to that condition, and assumed the covenants of the lease that on his insolvency or bankruptcy» all his interest and right thereunder should cease at the option of the lessor. That this condition and these covenants did not render the lease or the contract it evidences harsh or unconscionable is demonstrated by the fact that Philbin paid $9,000, and another now offers $12,000, for the lessee interest in it, subject to this condition.

Under the terms of the lease it was indispensable to the validity of the assignment of the lease to Philbin that the lessor give its written consent thereto. Induced by this condition of the lease, and the lessee’s covenants to surrender the lease and premises on his insolvency or bankruptcy, the lessor so consented. If there was such equity in the trustee’s case here that the condition and covenants should be avoided, then the court ought certainly to avoid the lessor’s consent to the assignment of the lease to Philbin and to put the parties as nearly as possible in their original positions,' and in that case the trustee would have no more interest in the lease and the premises than if the covenants and the conditions were enforced. The fact is, however, that the contract was fair and just. Philbin and the respondent knew the condition and the covenants in the lease. He bought the chance of the use of the leased premises, rent free, for the 8 years, on the condition that he should not have that use after his insolvency or bankruptcy, if either occurred during the IS years. The respondent consented to the assignment of the lease to Philbin in reliance upon the chance that he would soon become insolvent and bankrupt, and that then it could take back the premises. It is no ground for relief from a fair contract that a contemplated future contingency became an actuality somewhat earlier or later than the parties to the agreement as to the effect of its occurrence expected when they made it, and thus rendered the contract more or less beneficial than they respectively anticipated that it would be. at that time. Marble Co. v. Ripley, 77 U. S. (10 Wall.) 339, 355, 356, 357, 19 L. Ed. 955; Texas Co. v. Central Fuel Oil Co., 194 Fed. 1, 21, 114 C. C. A. 21, 41. So it is that, if anything harsh or unconscionable crept into the situation of these parties, it did not inhere in the (ease, or in its condition or its covenants, nor was it caused by any act or omission of the respondent. It was the early advent of the insolvency and bankruptcy of Philbin, and that alone, which caused it, and for that advent the lessor was not responsible.

Counsel for the trustee contend that the decree below should be sustained, in view of the opinion and decision of the District Court in In re Larkey, 214 Fed. 867. There was in that case a condition in the lease similar to that in the lease here under consideration. An involuntary .petition in bankruptcy was filed against the lessee and the District Court appointed a receiver thereunder. The leased premises were and continued -to be in the possession of third parties under a sublease from the lessee that had been made with the consent of the lessor. The lessor filed a petition in the bankruptcy proceeding for the recovery of the premises on account of the breach of the condition and covenants of the lease, and there was a hearing thereon; but before the court filed its opinion an adjustment had been made between the lessee and his creditors, and there never was any adjudication in bankruptcy. The court held, first, that there had been no breach of the condition; and, second, that if there had been, nevertheless, in view of the facts which have been stated, and especially of the fact that the sublessees, whom the lessor had approved and who offered ample security for the payment of the rent, were in possession of the premises, the equity of the lessor’s claim was not such as to successfully invoke the action^ of a court of equity. In view of the authorities that have been cited, the facts of this Darkey Case differ too radically from those of the case at bar to make it indicative of the conclusion which ought to be reached in this case. Many other decisions,' opinions, and statements in textbooks have been cited and discussed by counsel for the trustee. They have not escaped our careful perusal and consideration. None of them, however, has been found which sustains such a decree as that in hand upon a similar state of facts, and they and the exhaustive arguments of counsel have failed to persuade that there is any equity in the claim, petition, or proof of the trustee in this case. The record presents full, clear, and strict proof of the right of the respondent, as a matter of law, to the termination of the term of the lease and the lease itself, and to the return of the leased premises to it upon the service of its notice of election to enforce that right, and in such a case equity ought to and it does follow the law and enforce the right. The decree and orders below must therefore be reversed.

[3] The trustee, however, in his petition has prayed for more. He has prayed that the court determine the .rights of the respondent and of the trustee respectively in the leasehold estate. The leased premises are in the possession of the trustee. The respondent cannot take possession of them from him or from the court below without the order of that court or of this court. That court therefore had, and on this appeal this court has, jurisdiction of the property in controversy and of the parties to this litigation, and where a court' of equity has such jurisdiction it has the power, and in the interest of the spegdy administration of justice it is often its duty, to determine the rights of the parties, direct the disposition of the property, and end the litigation. It is thought, upon consideration, that this course ought to be pursued in this case to that end. All the arguments, suggestions, and authorities of counsel have received consideration, and it is decided and concluded that the term of the lease involved in this controversy terminated when the respondent’s notice, dated May 10, 1918, of its election to declare the lease forfeited and the term thereof ended, was served on or first came to the notice of Philbin or the trustee; that since that date, as against the respondent, the Empress Theatre Company, neither Philbin nor the trustee has had any right, title, or interest in the leased premises or under the lease, or any right to the possession or use thereof, but that the respondent has had since that time and still has the right to the exclusive possession and use of the premises; that the respondent is entitled to the immediate delivery to it by the court below and the trustee of these premises, and to the payment tp it by the trustee as a part of his expenses of handling the estate of the bankrupt, of the reasonable value of the use thereof from the termination of the term of the lease aforesaid to the time of such delivery, and to the payment of its costs in the proceedings in the court below and in this court which he instituted by the filing of his petition for the relief granted by the orders reversed.

Eet the order and decree of the court below, and the order of the referee referred to therein, be reversed, and let this case be remanded to the court below, with instructions to take further proceedings in accordance with the views expressed herein.