503 F.

2d 202

In the Matter of QUEENS BOULEVARD WINE & LIQUOR

CORP., d/b/a
Gold Star Wine & Liquor, Debtor-Appellee,
v.
Anita BLUM et al., Petitioner-Landlord-Appellants.
No. 179, Docket 73-1512.

United States Court of Appeals, Second Circuit.

Argued Nov. 29, 1973.
Decided June 11, 1974.

Robert M. Rosen, Garden City, N.Y. (Goldson, Rosen & Goldson, Garden
City, N.Y., on the brief), for debtor-appellee.
Jerome I. Lessne, New York City, (Leonard Holland, and Dreyer & Traub,
New York City, on the brief), for appellants.
Before MOORE, HAYS and TIMBERS, Circuit Judges.
TIMBERS, Circuit Judge:

On this appeal from an order entered in a Chapter XI proceeding in the Eastern

District of New York, Orrin G. Judd, District Judge, denying a landlord's
petitions and granting a debtor's petition for review of an order of a referee in
bankruptcy, the sole question is whether, under the circumstances of this case,
a bankruptcy court is required, pursuant to Sections 70(b) and 302 of the
Bankruptcy Act, 11 U.S.C. 110(b) and 702 (1970), to enforce a conditional
limitation in a commercial lease which authorized the landlord to terminate the
lease in the event its tenant should file a petition for an arrangement under
Chapter XI of the Act. The district court held that the bankruptcy court was not
so required. We affirm.
I.

The facts are not in dispute and may be briefly summarized.

The debtor-appellee, Queens Boulevard Wine & Liquor Corp. (Queens), owns
and operates a retail liquor store in Forest Hills, New York. On April 28, 1970,
it entered into a seven year lease with appellant, Carol Management Company
(Carol), for the premises at 103-05 Queens Boulevard. The lease was on the
New York Real Estate Board's standard form for stores. It included, as Article
16(b), a bankruptcy clause.1 This clause was amended by a typewritten
addendum, Article 63.2 The bankruptcy clause, as amended, permitted the
landlord to terminate the lease within a reasonable period after institution of
bankruptcy proceedings by or against its tenant upon the condition that there be
no forfeiture if obligations under the lease should remain unaffected by the
bankruptcy proceedings and if the tenant should continue to comply with the
terms of the lease, including prompt payment of rent. The lease further
provided that the landlord, at its option, could apply any or all of its tenant's
$8000 security against rent due.

By March 22, 1972, Queens had failed to pay the rent due on March 1. Carol
instituted a summary proceeding in the Queens County Civil Court seeking a
judgment of eviction and rent arrears. On the same day, Queens filed a petition
for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. 701 et
seq. (1970). It listed debts of approximately $370,000 and assets of
approximately $73,500.

Upon Queens' application, the referee on March 27 entered an order continuing

it temporarily in possession and, pending a final decree, staying the
commencement and continuation of suits to enforce liens against it. This
included Carol's state court summary proceeding.

Thereafter, pursuant to Carol's demands and the referee's order, Queens offered
on Arpil 4 to pay all rent then due subject to obtaining a surety bond which its
creditors required in order to stay its adjudication as a bankrupt. The landlord
found this to be satisfactory.3

While arrangements for obtaining the bond were underway, however, Carol
received an offer to lease the store at a higher rent. By a letter dated April 21, it
therefore served on Queens a notice of termination of the lease.

On May 11, having obtained the required bond, Queens tendered to Carol a
certified check for the full amount of the rent then due for the months of
March, April and May. Carol rejected this tender. It pressed its application to
have the March 27 stay vacated and to regain immediate possession of the
premises.

In an opinion filed on June 20, the referee held, among other things, that Carol
had not waived its option under Article 16(b) by its demands for rent and by its
April 21 letter it had effectively terminated the lease. The referee nevertheless
ordered that Queens continue in possession and directed it to pay a sum equal to
the rent as compensation for use and occupancy.4

10

The parties filed cross petitions for review of this order. Carol sought
immediate possession. Queens sought a declaration that the termination clause
was invalid. While these petitions were pending, Queens' creditors tentatively
accepted a plan of arrangement. The plan contemplates that Queens will remain
in possession of the leased premises throughout the term of the lease.
Confirmation of the plan has been adjourned pending determination of the
instant petitions for review.

11

As a result of an infusion of outside capital, Queens presently is operating at a

profit of approximately $2000 per week. It has continued prompt payments to
Carol for use and occupancy of the store. In addition, pursuant to an order of
the referee, it has paid to the trustee $1000 per week (such payments having
totalled more than $50,000 to date) to be applied toward payment of its debts if
the plan of arrangement is accepted and confirmed.
II.

12

Section 70(b) of the Bankruptcy Act, 11 U.S.C. 110(b) (1970), made applicable
here by Section 302 of the Act, 11 U.S.C. 702 (1970),5 provides in pertinent
part that:

13

'an express covenant that . . . the bankruptcy of a specified party . . . shall

terminate the lease or give the other party an election to terminate the same
shall be enforceable.'

14

Carol contends that the statute requires us to reverse the district court and to
award it immediate possession of the premises. Queens, on the other hand,
maintains that Carol's conduct prior to its April 21 notice of termination was
inconsistent with its subsequent attempt to invoke Article 16(b) and that Carol
therefore is estopped from terminating the lease. In the alternative, Queens
argues that a bankruptcy court, in the exercise of its inherent equitable powers,
may refuse to enforce a valid termination clause if the circumstances warrant.

15

Courts traditionally have not favored lease forfeitures. They often have strained
to construe forfeiture clauses narrowly or to find them not an 'express'

convenant within the requirement of the statute. See generally 4A Collier,

Bankruptcy P70.44(3), at 544-46 (14th ed. 1971). Even when such a lease
covenant has been found to be valid on its face, courts have created two
exceptions to mitigate the harsh consequences of what otherwise would be the
absolute mandate of Section 70(b). First, some courts have held that a landlord,
by conduct evidencing an intent to affirm the lease, may waive the right to
terminate or be estopped from asserting it. Speare v. Consolidated Assets Corp.,
360 F.2d 882, 887 (2 Cir. 1966); Davidson v. Shivitz, 354 F.2d 946, 948 (2 Cir.
1966); Matter of Frazin & Oppenheim, 183 Fed. 28 (2 Cir. 1910). Secondly, at
least two courts have held and others have suggested that they are empowered
to refuse enforcement of similar lease provisions of the ground that termination
would work a substantial injustice to the lessee and would serve only to
frustrate the basic reorganization purpose of Chapter X. Weaver v. Hutson, 459
F.2d 741 (4 Cir.), cert. denied, 409 U.S. 957 (1972); In re Fleetwood Motel
Corp., 335 F.2d 857 (3 Cir. 1964).6 Cf. In re Yale Express System, Inc., 362
F.2d 111, 117 (2 Cir. 1966); In re Penn Central Transportation Co., 347 F.Supp.
1351, 1353 (E.D.Pa.1972).
16

In the instant case, the referee found, and the district court accepted the finding,
that there was no waiver. We may not upset such a finding unless it is clearly
erroneous. In re Simon v. Agar, 299 F.2d 853 (2 Cir. 1962). True, the most
common indices of waiver are absent here. At no time prior to invoking its right
to terminate did Carol accept payment of rent. B.J.M. Realty Corp. v. Ruggieri,
338 F.2d 653, 654 (2 Cir. 1964). Nor did it delay unreasonably in giving notice
of termination. Geraghty v. Kiamie Fifth Avenue Corp., supra, 210 F.2d at 98.
Carol's conduct prior to April 21 nevertheless strongly suggests that it was
willing to accept payment of rent arrears, to forgive Queens' default and to
cintinue under the lease.

17

Carol's immediate response to the order staying the state summary proceeding
was a letter to Queens dated March 31 indicating complete awareness of its
right to terminate but refraining from doing so. Thereafter, on April 4, a hearing
was held on Queens' application to continue in possession. Carol again made
specific reference to its Article 16(b) right but stated its position as follows:

18

'We, of course, are looking for our rent for the months of March and April, and
also we want to have our rent secured for any other months in the lease. It is
our request now that the stay (of the state eviction proceedings) be lifted, or
else that the money be paid.'

19

Pursuant to these demands and in view of Queens' willingness to comply, the

referee ordered immediate payment of the rent. Carol agreed to accept payment.

Because of its inability to secure the required surety bond, however, Queens
temporarily was adjudicated a bankrupt and thus was unable to comply with the
order. On April 7, in response to Queens' application for a stay of the
bankruptcy adjudication, Carol once again demanded that the rent be paid or
that the stay of eviction proceedings be vacated.7
20

These demands strongly indicate that Carol initially was concerned primarily
with being paid and that it intended to accept tender of the rent. Relying on this,
Queens, its creditors and their attorneys worked assiduously to obtain the
necessary indemnity and to formulate a satisfactory plan of arrangement. It was
not until these negotiations were well underway that Carol, on April 21, sent its
notice of termination; and it did so then only because it had found a new tenant
willing to pay a higher rent. Moreover, Carol was entitled throughout to set off
against Queens' sizeable security deposit its claims for rent that was due, but
did not do so despite its agreement to accept payment. And under Article 63 of
the lease, Carol continued to be bound even in the event of a bankruptcy
adjudication as long as the rent was paid. The cumulative effect of these facts
lends weight to Queens' estoppel argument. We do not rest our decision on this
ground, however, for we find persuasive those cases relied upon by the district
court which hold a lease termination provision to be unenforceable when
compelling equitable and policy considerations so require.

21

In re Fleetwood Motel Corp., supra, involved a Chapter X reorganization of a

publicly owned hotel corporation. In refusing to order a debtor from possession
pursuant to a lease forfeiture provision similar to the instant one, the court held
that the validity of the clause on its face under Section 70(b), without more,
was insufficient to justify enforcement. The court proceeded to consider
whether forfeiture was reasonable when balanced against competing public
interest considerations and whether it was consistent with the purposes of the
Act. It concluded that, since termination would result in a windfall surrender to
the landlord of the corporation's only assets (the hotel and its fixtures), would
vitiate the reorganization proceedings and would cause an unnecessary loss to
the investing public, enforcement of the forfeiture clause would be inequitable
and would be inimical to the purposes of Chapter X.

22

In Weaver v. Hutson, supra, upon facts similar to those in Fleetwood, the court
also refused on equitable grounds to enforce a lease termination provision. The
court in Weaver looked beyond the validity of the forfeiture provision on its
face. It considered the effects of enforcement upon the debtor and the public,
and whether termination would be consistent with the purposes of the Act. In
denying rehearing, the court summarized the basis of its decision:

23

'The fundamental bases of decision throughout was that the Landlords'

insistence upon a forfeiture was highly unconscionable and inequitable in the
circumstances-- a demand for blood. The conclusion generally was that as a
court of equity the bankruptcy court had the discretion and power to refuse
enforcement of (the forfeiture provision) . . .. Furthermore, we declined
forfeiture in the circumstances as defeating the reorganization aims of Chapter
X.' 459 F.2d at 745.

24

We recognize that Fleetwood and Weaver are distinguishable on their facts

from the instant case. Queens is not a publicily held corporation.8 The benefit
to the landlord here, in terms of a substantially higher rental income, is different
from that in Fleetwood and Weaver where the landlords stood to acquire
substantial tenant assets. Despite these and other factual differences, we find
the rationale of those cases to be applicable here.

25

The purpose of a Chapter XI arrangement, as with a Chapter X reorganization,

is to preserve a viable business enterprise where possible and especially when
that will be in the 'best interest of . . . creditors.' 11 U.S.C. 766 (1970). See In re
Peoples Loan & Investment Co., 410 F.2d 851 (8 Cir. 1969). Cf. 9 Collier,
Bankruptcy P9.17, at 281 (14th ed. 1972). In determining whether to enforce
the lease termination here, therefore, we must consider not only the interests of
the landlord but also those of the debtor and its creditors. Possession by Queens
will not prejudice Carol, which is protected by a sizeable security deposit,
except to deny it a windfall in the form of increased rent to which we hold it is
not equitably entitled. Enforcement of the forfeiture, on the other hand, would
destroy a now profitable debtor by depriving it of its most valuable asset-- its
location. It also would needlessly injure trade creditors and those outside
investors who have furnished capital which has resulted in Queens'
rehabilitation. In our view, these individuals stand on no less significant a
footing than did the shareholders of the debtors in Weaver and Fleetwood.

26

Our decision clearly is distinguishable from and in no way inconsistent with

those cases which have upheld a termination clause such as that in the instant
case. E.g., Finn v. Meighan, supra, 325 U.S. at 301; Model Dairy Co., Inc. v.
Foltis-Fischer, Inc., 67 F.ed 704, 706 (2 Cir. 1933). Cf. B.J.M. Realty Corp. v.
Ruggieri, 326 F.2d 281, 282 (2 Cir. 1963). In none of these cases would
forfeiture have 'seriously impaired', let alone totally frustrated, an arrangement
by depriving the debtor of an asset absolutely necessary to its continued
viability. Compare Finn v. Meighan, supra, 325 U.S. at 302. Nor would relief
from forfeiture in any of these cases have caused no harm whatsoever to the
landlord. And in none of these cases did the landlord reject tender of the full

amount of the rent due before any court had adjudicated its rights under the
lease.
27

Our decision does not deprive Section 70(b) of its statutory effect in those cases
to which it is applicable. Bankruptcy forfeiture provisions are necessary for the
protection of landlords and generally are enforceable. We hold only that, under
the particular circumstances of this case, termination of Queens' lease would be
grossly inequitable and contrary to the salutary purpose of Chapter XI.

28

Affirmed.
HAYS, Circuit Judge (dissenting):

29

I dissent.

30

The applicable federal statute, 11 U.S.C. 110(b), states clearly that a covenant
like the one used here is enforceable. The courts have created two exceptions to
this rule. The first is where the landlord has waived his rights. There is no
waiver here. The second is where enforcement would run contrary to a strong
public interest. Smith v. Hoboken R.R., Warehouse & S.S. Connecting Co., 328
U.S. 123, 66 S.Ct. 947, 90 L.Ed. 1123 (1946); Weaver v. Hutson, 459 F.2d 741
(4th Cir. 1972), cert. denied, 409 U.S. 957, 93 S.Ct. 288, 34 L.Ed.2d 227
(1973); In re Fleetwood Motel Corp., 355 F.2d 857 (3d Cir. 1964). Smith, the
only such case decided by the Supreme Court, is clearly distinguishable from
the instant case. It involved important considerations under the Interstate
Commerce Act and a degree of public interest with which this case cannot
compare.

31

Weaver and Fleetwood Motel, even if they were correctly decided, are also
distinguishable in that forfeiture in those cases would have created a windfall to
the landlords by virtue of improvements on the leased properties. This fact was
especially important because the debtors were publicly held and forfeiture
would have resulted in loss to innocent shareholders. In both cases the SEC
appeared on behalf of the shareholders. This underscores the public interest
involved in those cases. There is nothing approaching that degree of public
interest in this case.

32

To affirm here would essentially deprive section 110(b) of any force. The claim
that a liquor store involves the public interest is frivolous. The interest of the
creditors is no different from what it would be in any bankruptcy proceeding.
There is no windfall to the landlord here other than higher rent from a new

tenant, and this 'windfall' is present in everey case like this because the landlord
would never terminate the lease unless he could relet at a higher rent. If section
110(b) does not apply here, it is hard to imagine a case where it would apply.

Article 16(b) of the lease provides:

'If at the date fixed as the commencement of the term of this lease or if at any
time during the term hereby demised . . . Tenant make an assignment for the
benefit of creditors or petition for or enter into an arrangement this lease, at the
option of Landlord, exercised within a reasonable time after notice of the
happening of any one or more of such events, may be cancelled and terminated
. . ..'

Article 63 of the lease provides:

'Notwithstanding the provisions of Article '16' hereof, in the event no relief is
requested in any of the bankruptcy proceedings set forth in Article '16' hereof to
disaffirm this lease, or to reform the same, . . . and provided, further, that all
rent, additional rent and other charges due from Tenant under this lease are paid
promptly when due, . . . this lease shall not be terminated as provided in Article
'16' hereof, but shall continue in full force and effect.'

When Queens found itself unable immediately to obtain the surety bond, the
referee adjudicated it to be a bankrupt. On Arpil 11, however, the referee
modified this order and granted Queens leave to continue in possession subject
to its posting the indemnity bond

Carol's continued acceptance of payments for 'use and occupancy' does not
constitute acceptance of 'rent'. Matter of Wil-Low Cafeterias, Inc., 95 F.2d 306,
309 (2 Cir.), cert. denied, 304 U.S. 567 (1938)

Geraghty v. Kiamie Fifth Avenue Corp., 210 F.2d 95 (2 Cir. 1954) (Ch. XI);
Finn v. Meighan, 325 U.S. 300, 302-03 (1945) (Ch. X)

Since Chapters X and XI both contemplate the continued viability of the

debtor, the fact that Weaver and Fleetwood arose in the context of Chapter X
proceedings does not diminish their relevance here

Carol's attempt to vacate the stay of state eviction proceedings is not

inconsistent with its demands for payment of rent. Under Section 751(1) of the
N.Y. Real Property Actions and Proceedings Law (McKinney 1963), payment
of rent is a valid defense to an action for eviction and rent arrears

The fact that the SEC appeared on behalf of the shareholders in Fleetwood and
Weaver and not in the instant case is but another distinction between a Chapter
X reorganization and a Chapter XI arrangement. The SEC has certain statutory
responsibilities under the former, none under the latter