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In re Clerc Chemical Corp.

May 1, 1944


Appeal from the District Court of the United States for the District of New Jersey; Guy L. Fake, Judge.

Author: Mclaughlin

Before BIGGS, JONES, and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge.

This is a bankruptcy matter involving the construction of a lease. The pertinent paragraphs of the lease are:

"This Lease made this 24th day of November, 1941, between Reilly Tar & Chemical Corporation, an Indiana corporation, duly qualified to transact business in the State of New Jersey, (hereinafter called the Lessor), and Frederick D. Loeb, trading as Purax Chemical Products Company (not incorporated) with offices located at 1265 Broadway, New York, N.Y., (hereinafter called the Lessee ), Witnesseth:"

"(8) Bankruptcy, etc.: If the Lessee shall be adjudicated a bankrupt, file a voluntary petition in bankruptcy, make a general assignment for the benefit of creditors, or if a receiver of its properties and assets shall be appointed, then and in that event the Lessor shall have the option to terminate this lease as of the tenth day after: (a) the appointment of a receiver, or (b) the adjudication of bankruptcy, if no receiver be appointed, or (c) the filing of a voluntary petition in bankruptcy, or (d) the general assignment for the benefit of creditors, as the case may be."

"(10) Assignment, etc.: The Lessee shall have the right to assign this lease to any corporation, formed by him, provided, however, that in the event of such assignment the Lessee shall guarantee the rentals due hereunder. With this exception, the Lessee shall not assign, mortgage, or encumber this lease, nor sublet, nor underlet the premises nor any part thereof without the written consent of the Lessor. In case said premises shall be vacated during the term of this lease, the Lessor may take immediate possession thereof for the remainder of the term and in its discretion may relet the same and apply the proceeds in satisfaction of the rent due under this lease. The Lessee shall remain liable for any unpaid balance of such rent."

"(19) Successors, etc.: The terms, covenants, conditions and agreements herein contained shall be binding upon the parties hereto and their respective successors and assigns."

On December 1, 1942 Loeb assigned the lease to Clerc Chemical Corporation. The assignment, in accordance with its terms, was "subject nevertheless to the rents, covenants, conditions and provisions therein [in the lease] also mentioned." An involuntary petition in bankruptcy was filed against Clerc Corporation on July 22, 1943 and thereafter that company was adjudicated a bankrupt. On August 10, 1943, Reilly Tar, the owner and lessor, served Clerc "as assignee of the lessee mentioned in the lease" with a notice of the exercising of its option to terminate the lease because of the bankruptcy. The receiver in bankruptcy. of Clerc took the position that the bankruptcy of Clerc did not operate as a forfeiture of the lease; therefore, that the lease was part of the bankrupt estate and to be disposed of as such. The matter was heard by the referee who sustained the receiver. The District Court, on review, confirmed the order of the referee. This is an appeal by the owner lessor, Reilly Tar & Chemical Corporation, from the order of the District Court.

Appellant contends that by virtue of Paragraph 19 of the lease, the bankruptcy forfeiture clause in Paragraph 8 is applicable to the bankrupt assignee. The difficulty with this is that Loeb is deliberately designated as the named lessee with Paragraph 8 providing for forfeiture only in the event the lessee shall be adjudicated a bankrupt. There is neither mention of nor allusion to assigns, successors or anyone else. The same centering on Loeb as the lessee persists in Paragraph 10 where he, as lessee, continues to guarantee the rentals even if he should assign the lease to a corporation formed by him. The assignment itself expressly states not that Clerc assumes the lease but takes it "subject nevertheless to the rents, covenants, conditions and provisions" mentioned in the lease. Even the notice of the owner to repossess indicates that the latter understood the specific designation of Loeb as lessee when it refers to him as " * * * the lessee mentioned in the lease."

While perhaps the suggestion that the Bankruptcy Court as an Equity Forum discourages forfeitures can be overstressed at times, nevertheless, where the signs point surely to the purpose of the parties and that intent is plainly directed to forfeiture only in the event of the bankruptcy of the named lessee, certainly a strained construction should not be attempted to actually encourage forfeiture in an instance where none was contemplated. In re Murray Realty Co., D.C.N.D.N.Y., 35 F.Supp. 417, 418, is very much like the case at bar. There a lessee, one Edwards, assigned his lease to a corporation. The lease provided in part:

"It is further agreed that the insolvency or bankruptcy of the second party '[Edwards]' or of any successor, shall at the option of the first party, '[the lessor]' its successors and assigns, terminate this lease and change the second party and all persons holding under him into a tenant or tenants 'holding over' after the expiration of the term without consent."

The court held that the word "successor" in the above quoted lease provision did not include lessee's assignee and, therefore, that the lease was not forfeited and was part of the bankruptcy estate. The court said page 418 of 35 F.Supp.:

"The sole issue presented in this case is whether the word 'successor' contained in the option paragraph includes the assignee of the original tenant. In reaching a conclusion as to the construction of the word 'successor', it should be noted that in describing the lessor in whose favor the option exists, the phrase 'first party, its successors and assigns' is used. Although the testimony does not show the fact, it may be assumed that the lease was drawn by someone familiar with legal phrases and their connotation, and the failure of the draftsman to refer to 'assigns' with respect to ...

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