This case poses the question of the correct measure of damages allowable to a lessor creditor of a railroad debtor for the rejection of a lease under the reorganization provisions of Section 77 of the Bankruptcy Act. The determination depends upon the meaning of the definitive clause 'to the extent of the actual damage or injury determined in accordance with principles obtaining in equity proceedings.' Certiorari was granted, 305 U.S. 584, 59 S.Ct. 65, 83 L.Ed. — under Section 240(a) of the Judicial Code, 28 U.S.C.A. § 347(a), because the case involves an important question of federal law which should be settled by this Court.
On December 19, 1906, the Connecticut Railway and Lighting Company, petitioner here, leased certain gas, electric and street railway properties for 999 years to the Consolidated Railway Company, predecessor of the New York, New Haven and Hartford Railroad Company, hereinafter referred to as the New Haven. By a subsequent assignment the New Haven was divested of everything except the transportation properties involved here. On February 28, 1910, these were transferred to a wholly-owned subsidiary of the New Haven. Some question arose in the reorganization proceedings as to the New Haven's liability on the 1906 lease after this transfer to its subsidiary. The lower court, however, held the New Haven liable as lessee, and, no attack having been made upon this ruling, we treat, without further consideration, the Connecticut Railway as a lessor and the New Haven as lessee.
The lease gave the lessor the option to terminate, on default of the lessee, and to repossess the property 'without prejudice to its right of action for arrears of rent or breach of covenant.' It contained no provision for liquidation of damages for breach of the entire lease.
The New Haven agreed to pay all taxes on the property and on the lessor's income from the property. It also paid $1,049,563.50 annually for the street railways. Of this amount, $504,975 was intended to provide for the payment of interest on the Connecticut Pailway's bonds and for payments into a sinking fund. These interest and sinking fund payments created a claim upon the lessor for the contents of the fund at the date of payment of the bonds. The arrangement looked to the cancellation of the bonds in 1951 by the New Haven's payments, and the issuance by the Connecticut Railway of new bonds in their place. The delivery to it of these bonds, the New Haven agreed, would liquidate its claim for the contents of the sinking fund. In effect the annual reserved rent would then be considerably decreased, for the interest and sinking fund payments would be for its benefit as owner of the new bonds.
On October 23, 1935, the New Haven filed its petition under Section 77 of the Bankruptcy Act. The petition was approved and the respondents were appointed trustees. On December 18, 1935, they rejected the 1906 lease with the approval of the court. On November 16, 1936, the Connecticut Railway repossessed the street railway properties.
The Connecticut Railway filed claims against the New Haven's estate for numerous items, among them damages for breach of the lease and for deficiencies in property returned. It claims $23,190,314.73 as damages for rejection of the lease. This sum is alleged to be 'the difference between the present worth of rent and of rental value for the balance of the term of the lease, liquidated by discounting at 4%.'
The District Court held that under Section 77 the lessor is a creditor for actual damages accruing from the rejection of the unexpired lease to the latest practicable date in the reorganization for presentation of lessors' claims. Damages were measured by the difference between the rent reserved in the lease and the net earnings of the property. The court allowed the amount proved up to June 20, 1937, with leave to the Connecticut Railway to apply for further hearings to liquidate damages suffered after that date.
The Circuit Court of Appeals affirmed, approving the trial court's exclusion of any future damage which had not accrued up to the latest possible hearing in the proceedings.