Certiorari was granted in this and three following cases (Kuehner v. Irving Trust Co., 299 U.S. 445, 57 S.Ct. 298, 81 L.Ed. 340; Schwartz v. Irving Trust Co., 299 U.S. 456, 57 S.Ct. 303, 81 L.Ed. 348; Meadows v. Irving Trust Co., 299 U.S. 464, 57 S.Ct. 307, 81 L.Ed. 353) involving the construction and validity of provisions of section 77B of the Bankruptcy Act which enlarge the category of provable claims to include one by a landlord for injury due to rejection of a lease, or for damages or indemnity under a lessee's covenant.
Florence H. Bugbee, the petitioner's assignor, leased to United Cigar Stores Company of America premises in Trenton, N.J., for a term commencing April 1, 1926, and ending March 31, 1946. August 29, 1932, the lessee was adjudicated a bankrupt upon its own petition. November 11, 1932, the respondent, as trustee in bankruptcy, rejected the lease and abandoned the premises, a portion of which had been sublet by the bankrupt. Without notice to the Cigar Stores Company the landlord relet portions of the building to subtenants in possession and let other portions to new tenants.
June 9, 1934, two days after the passage and effective date of section 77B, the Cigar Stores Company, as permitted by subsection (p), 11 U.S.C.A. § 207(p), filed in the pending bankruptcy proceeding its petition for reorganization. In the latter cause the petitioner presented a proof of claim for injury resulting from the rejection of the lease. The trustee objected to the claim and asked to have it expunged for the reason that the lease incorporated no covenant to indemnify the lessor for loss of rents or other provision enabling her to hold the tenant for damages or for rent accruing subsequent to termination of the leasehold estate, and asserted the leasehold had been terminated and all obligations of the debtor under the lease extinguished by the landlord's re-entry and reletting.
The special master who heard the cause recommended disallowance of the claim in the view that section 77B did not, and could not, create any valid and legal claims against the debtor where none existed anterior to the enactment of the section, and held that none existed before its adoption because by the law of New Jersey, the landlord's re-entry and reletting worked a surrender of the leasehold. In his report the master referred to the fact that the record in the earlier bankruptcy proceeding disclosed a claim filed by the landlord, upon which dividends had been paid, for expenditures in restoring a party wall and closing up a common entrance in the leased building based upon the debtor's agreement to restore it at the expiration of the term, which was again asserted in the present proceeding. He thus commented upon this situation: 'Naturally, the entire basis of this claim for restoration is the expiration of the lease. The Trustee may well point to it, as showing that the Landlord, prior to the enactment of section 77B, by her re-entry and reletting of the premises as aforesaid, considered that the lease terminated and expired.'
The District Court approved the master's report and rejected the claim; and the Circuit Court of Appeals affirmed, holding that the injury specified in section 77B(b)(10), 11 U.S.C.A. § 207(b)(10) for which a claim by a landlord is allowable can only be such injury as would found an action under applicable state law. The court concluded that although according to the law of New Jersey the re-entry and reletting did not effect a surrender, the restoration of the building was such an assertion of dominion by the landlord as to deprive her of any further claim against the tenant.
The parties differ with respect to the correctness of the Circuit Court of Appeals' interpretation of the law of New Jersey. They also disagree as to whether the record supports the finding that the landlord restored a portion of the leased building. The disputes need not be resolved if the petitioner is right in asserting that, within the purview of section 77B, the lessor was a person injured by the rejection of the lease who is accorded a provable claim against the debtor's estate for the injury, notwithstanding the re-entry, reletting, and restoration of the premises, after rejection of the lease, consummated a surrender of the leasehold, and ended the tenant's liability under the local law. As section 77B supplements and extends the bankruptcy system in force at the time of its enactment, we shall examine the question in the light of the old law, the supposed mischief arising under it and the alterations made by the later act.