City Bank Farmers Trust Co. v. Irving Trust Co.

Background

Florence H. Bugbee, a landlord, leased premises to United Cigar Stores Company. The tenant was adjudicated bankrupt, and the trustee rejected the lease and abandoned the property. The landlord relet parts of the building without notifying the bankrupt tenant. After the new reorganization law (section 77B) took effect, the tenant filed for reorganization and the landlord presented a proof of claim for injury from the lease rejection. The trustee objected, arguing the landlord’s reentry and reletting ended the lease under New Jersey law and barred the claim. The lower courts disallowed the claim.

Reasoning

The Court examined the old rule, the reason Congress adopted section 77B, and the statute’s language. Under prior law landlords often had no provable claim for future rent or damages after rejection, which Congress intended to fix. Section 77B treats a person injured by rejection as a creditor and makes claims for injury or for covenant indemnity provable. The Court held that this provability is not destroyed by a landlord’s later reentry, reletting, or other state-law termination. The statute does not create a new cause of action; it treats the rejection as a breach and limits recoverable damages, typically measured by the present value difference in rent and capped by the statute’s three-year rule.

Real world impact

The ruling allows landlords in reorganization proceedings to prove claims for losses caused by rejected leases even if they later retake or relet the premises. Recoveries remain limited and landlords must give credit for actual rental value. The case was reversed and remanded for further proceedings consistent with this ruling, and two Justices did not participate.