In this case we are concerned with that portion of subsection (b)(10) of section 77B of the Bankruptcy Act (11 U.S.C.A. § 207(b)(10), which limits the claim of a landlord for indemnity under a covenant in a lease to an amount not to exceed three years' rent.
The questions are: (1) Is the claim so limited in all events and for all purposes or is the surplus over the specified amount, though subordinated to the claims of other creditors, to have priority over the interests of stockholders or to be reserved as a liability of the reorganized corporation? (2) If the claim is limited in all events to the named amount, is the provision obnoxious to the Fifth Amendment of the Constitution?
The petitioners leased real estate to United Cigar Stores Company in 1926 for a term expiring in 1946. August 29, 1932, the company was adjudicated a voluntary bankrupt. November 14, 1932, the trustee rejected the lease and abandoned the premises. The following day the petitioners reentered and terminated the leasehold in accordance with the provisions of the lease which contained a covenant by the lessee to indemnify them against all loss of rent from such termination. Immediately upon adoption of section 77B the bankrupt filed its petition for reorganization thereunder, which was approved by the court.
The petitioners presented a proof of claim, measuring the injury resulting from the termination of the leasehold by the difference between the rental value and the value of the rent reserved for the remainder of the term. They prayed that the amount claimed be ranked on a parity with other provable debts to the extent of three years' rent and, as to the balance, be subordinated to other provable debts but awarded priority over the claims or interests of the debtor's stockholders. The trustee asked that the allowance be in an amount limited as provided by the statute. Committees representing preferred stockholders and debenture holders objected to allowance of the claim in any amount, asserting the petitioners could not sue on the covenant of indemnity under the state law until the expiration of the term and, having no presently enforceable claim under state law, had none in the reorganization proceeding. The petitioners amended their pleading by adding a prayer that to the extent any portion of the claim might be held not allowable a charge be reserved against the debtor's assets for such portion in priority to any interest accorded stockholders.
The uncontroverted testimony is that the fair rental value for the balance of the term is $111,545,36. The future installments of rent to the end of the term agregate $199,237.66. A special master recommended that the petitioners' claim be allowed and liquidated at the amount of the difference between present rental value and present value of the rent reserved. He found that the sum so ascertained would be not less than the equivalent of three years' rent and recommended allowance of the claim on a parity with provable debts to the extent of three years' rent-$44,377.55-and the reservation of all questions as to the balance until the time for classification of creditors and consideration of a reorganization plan. The District Court confirmed the master's report save that it decided the claim as allowed should represent the extent of claimants' right to participate in the proceedings. Cross-appeals were taken to the Circuit Court of Appeals which held that petitioners had a provable claim, that the method adopted for the liquidation of the claim was proper, that section 77B required limitation of allowance to a sum not in excess of the three years' rent mentioned in the statute and that such limitation does not take petitioners' property without due process of law in violation of the Fifth Amendment. We granted certiorari because of the importance of the questions involved.
The respondent stockholders' committee does not now deny that the petitioners have a provable claim but joins the trustee in support of the decision below that the allowance must be limited for all purposes of the proceeding to three years' rent.