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FINN v. MEIGHAN

decided: May 21, 1945.

FINN, TRUSTEE
v.
MEIGHAN, SUBSTITUTED TRUSTEE



CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.

Stone, Roberts, Black, Reed, Frankfurter, Douglas, Murphy, Jackson, Rutledge

Author: Douglas

[ 325 U.S. Page 300]

 MR. JUSTICE DOUGLAS delivered the opinion of the Court.

Childs Company operates a chain of restaurants. In August 1943 it filed a voluntary petition for reorganization under Ch. X of the Bankruptcy Act (52 Stat. 885, 886, 11 U. S. C. §§ 526, 530) alleging that it was unable to pay its debts as they matured. The petition was approved

[ 325 U.S. Page 301]

     and petitioner was appointed trustee of the debtor. Childs Company had been lessee of, and had operated a restaurant on, certain premises in New York City for over forty years. Its present lease is for a term of twenty-one years ending in 1947. That lease contains the following provision:

"The tenant covenants that . . . if a petition in bankruptcy shall be filed by the tenant or if the tenant shall be adjudged bankrupt or insolvent by any Court, or if a trustee in bankruptcy of the tenant shall be appointed in any suit or proceeding brought by or against the tenant, then and in each and every such case, the term hereby granted shall immediately cease, determine and come to an end, and the landlord may recover and resume possession of the demised premises by any legal means." (Italics added.)

In May 1944 petitioner advised the lessor that it desired to assume the lease. Respondent replied that the lease had ceased and come to an end by virtue of the bankruptcy proceedings. Thereafter, respondent petitioned the bankruptcy court for an order adjudging that the term granted by the lease had terminated. The court granted the relief asked by the petition. The Circuit Court of Appeals affirmed. 146 F.2d 594. The case is here on certiorari.

The bankruptcy court does not look with favor upon forfeiture clauses in leases. They are liberally construed in favor of the bankrupt lessee so as not to deprive the estate of property which may turn out to be a valuable asset. Gazlay v. Williams, 210 U.S. 41; Model Dairy Co. v. Foltis-Fischer, 67 F.2d 704, 706. But an express covenant of forfeiture has long been held to be enforceable against the bankruptcy trustee. Empress Theatre Co. v. Horton, 266 F. 657; Jandrew v. Bouche, 29 F.2d 346. And the 1938 revision of the Bankruptcy Act made no change in that regard. Congress granted the trustee sixty

[ 325 U.S. Page 302]

     days (unless reduced or extended) in which to assume or reject a lease. § 70 (b) of the Bankruptcy Act as amended, 11 U. S. C. § 110 (b). But at the same time, Congress provided:

"A general covenant or condition in a lease that it shall not be assigned shall not be construed to prevent the trustee from assuming the same at his election and subsequently assigning the same; but an express covenant that an assignment by operation of law or the bankruptcy of a specified party thereto or of either party shall terminate ...


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