BANKRUPTCY TERMINATING LEASE

The subject of the bankruptcy of lessor as creating option in lessee to terminate lease is discussed in the December issue of the Yale Law Journal.

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By far the large majority of cases which consider the effect of the bankruptcy of one of the parties to a lease involve claims by lessors against lessees or their trustees in bankruptcy, and consequently the results in certain situations are fairly predictable. Thus, where there is a lease of realty, rent accruing subsequent to the tenant's petition in bankruptcy is not a claim provable against his estate under the present Bankruptcy Act, and recovery is limited to a personal action against the bankrupt himself. But if the lease provides for acceleration of future rent in event of the lessee's bankruptcy, a claim for that rent is provable. Where the lessor of realty is given a statutory lien for future rent on goods upon the premises, it has been held that bankruptcy does not destroy that lien. If the lessor re-enters, under a provision for re-entry in the lease, the tenancy is said to be terminated, and the bankrupt or his trustee are responsible neither for subsequent rent that would otherwise have accrued, nor for any deficiency in the rent which the lessor may suffer upon re-letting. Another type of claim was recently illustrated in a North Carolina case, where a petition by a landlord for forfeiture of the lease and possession of the premises held by an insolvent lessee corporation in the hands of a receiver was denied on the ground that the receiver had. tendered all rent and costs to the landlord before judgment."

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The recent case of In re Civic Center Realty Co., 26 F. (2d) 825 (D. Md. 1928), however, raises a novel and more open question. The Realty Company, as lessor of office space under a five-year lease, was to effect certain alterations in the building, and to assume the unfinished portion of the lessee's existing lease in another building with another party, the lease not to be effective until completion of the alterations. While the lease was entirely executory, the lessor was adjudicated an involuntary bankrupt. Although the trustees asserted their ability to carry out the agreement, the lessee petitioned for release, which was granted on the grounds of the uncertainty of performance

In re Mlle. Lemaud, Inc., 13 F. (2d) 208 (D. Mass. 1926). By § 63a of the Bankruptcy Act, claims provable against the estate are those which are “(1) a fixed liability . . . absolutely owing at the time of the filing of the petition . . whether payable or not . . . (4) founded upon an open account, or upon contract express or implied." 30 STAT. 563 (1898), 11 U. S. C. § 103 (1927).

2 In re Hook, 25 F. (2d) 498 (D. Md. 1928); cf. Kessler v. Slappey, 34 Ga. App. 614, 130 S. E. 921 (1925); 3 Williston, Contracts (1920) § 1985.

Rosenblum v. Uber, 256 Fed. 584 (C. C. A. 3d, 1919); Note (1910) 31 L. R. A. (N. s.) 270; cf. Note L. R. A. 1917F 657 (referring to articles on different aspects of the subject).

Dove v. Davis, 25 F. (2d) 967 (C. C. A. 5th, 1928); Britton v. West

ern Iowa Co., 9 F. (2d) 488 (C. C. A. 8th, 1925).

Ex parte Houghton, Fed. Cas. No. 6,725 (D. Mass. 1871).
In re Shaffer, 124 Fed. 111 (D. Mass. 1903).

7 Coleman v. Carolina Theatres, Inc., 195 N. C. 607, 143 S. E. 7 (1928). The decision was also based on statute. 1 N. C. CONS. STAT. ANN. (1919) §§ 2343, 2372

of the covenants by the lessor, and the injustice of forcing the lessee to give up the premises it then occupied and abide by the lease.

The lack of authority where the lessor becomes insolvent is probably due to the fact that ordinarily a lessor's bankruptcy would not cause a tenant of realty any apprehension or desire to be relieved from the lease. Thus, while holding that the bankruptcy of a tenant ipso facto terminates the relation of landlord and tenant, one court said by way of dictum:"

different reasons would require a different result in case a landlord should become bankrupt. In that case, where the legal title to the real estate would devolve upon the trustee in bankruptcy, and who would then be the substituted but temporary landlord by operation of law, the land itself might be regarded as performing such duties to the tenant as his need srequired.

Change of ownership of real estate never affects the rights of the tenant. It is a matter with which, in normal cases, he has no concern."

Part of an able report 10 by a Special Master argues to the same effect:

"Bankruptcy of a landlord would not ordinarily constitute an anticipatory breach because his obligation in the lease is not ordinarily one to pay or deliver something in the future. He has already, by the lease, granted a term in property."

The doctrine that where one party to an executory contract puts it out of his own power to perform it, there is an anticipatory breach giving the other party an immediate right of action for damages, is generally accepted in the United States." In applying this rule to the case of an insolvent corporation in the hands of a receiver, it has been said that,

"Bankruptcy is a complete disablement from performance and the equivalent of an out and out repudiation, subject only to the right of the trustee, at his election, to rehabilitate the contract by performance."'12 This statement, however, would seem properly subject to a limitation imposed in a similar case: "It is probable that bankruptcy and insolvency do not break contracts when they do not in fact prevent performance." 1 The landlord of a bankrupt tenant is faced with the prospective failure of his principal and often sole consideration—the payment of rent. But, as the assurance of occupation and the quiet enjoyment of the premises will generally insure to the lessee substantial fulfilment of his expectations under the lease, there is less justification for regarding the lessor's bankruptcy as an anticipatory breach.

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However, the bankrupt lessor in the instant case had

8 In re Hays, Foster & Ward Co., 117 Fed. 879 (D. Ky. 1902). This decision is clearly the minority view on this point. See infra note 18. • Ibid. 884.

10 See In re Bissinger Co., 5 F. (2d) 106, 112 (D. Ohio, 1925). 11 ANSON, CONTRACTS (Corbin's ed. 1924) § 385; 3 WILLISTON, CONTRACTS (1920) § 1314.

12 See In re Neff, 157 Fed. 57, 61 (C. C. A. 6th, 1907); cf. also In re Swift, 112 Fed. 315 (C. C. A. 1st, 1901); In re Pettingill, 137 Fed. 143 (D. Mass. 1905).

13 See Penn. Steel Co. v. N. Y. City Ry., 198 Fed. 721, 743 (C. C. A. 2d, 1912).

14 See supra notes 9 and 10.

also undertaken the supplementary covenants to assume the unfinished portion of the lessee's existing lease, and to effect certain alterations in the specified office space at a cost of some $5,000. The court held that his bankruptcy rendered the performance of these covenants so uncertain as to give the lessee a proper claim for release. The decision was based on the case of Central Trust Co. v. Chicago Auditorium Association.15 in which the Supreme Court held, in a case of an executory contract for rights of baggage and livery service in a hotel, the performance of which would require the use of capital by the baggage company, that the bankruptcy of the latter constituted an anticipatory breach, damages for which gave rise to a provable claim against the bankrupt's estate. It would seem questionable whether in view of the dissimilarity of the facts, the instant court was justified in its statement that while the Auditorium case "goes on the basis of an action for anticipatory breach, the same principles which support that action operate to give the lessee here the right to ask relief from his contract." In the Auditorium case it was the "lessee" who was bankrupt. The hotel company could plead prospective failure of the whole consideration the payment of rent. In the instant case, the lessee has as a basis for his claim only the uncertainty of the performance of certain supplementary covenants by the bankrupt lessor. It would seem

this principle to leases of realty." But subsequently in In re Bissinger the rule of the Auditorium case was held to apply in both situations. Although the Bissinger case arose on the bankruptcy of the lessee, the suggestion that "if the landlord perchance in a lease had agreed to rebuild or repair or do anything involving financial outlay, his bankruptcy should be regarded as an anticipatory breach of that provision in the lease." 23 would apply directly to the instant case. But the situation was soon thrown into worse confusion by the subsequent reversal of the Bissinger case on the grounds that under the common law, which Ohio still followed in relation to leases, the distinction between contracts relating to personalty and contracts relating to realty, suggested in the Auditorium case, still exists, and a claim for anticipatory breach of the latter is not provable in bankruptcy." The historical and technical basis for this decision seems too rigid in the face of practical arguments. However, that this distinction still persists

in the State courts as well, is evidenced by the recent Georgia case of Kessler v. Slappey in which, after a summary of the cases, the court said:

"These cases and others seem to formulate the rule in executory contracts pertaining to lease of realty, that not only is the contract not terminated by bankruptcy, but that a breach is not occasioned thereby, so as to give rise to a claim provable in the bankruptcy court."""

breach that the repudiation must go to the entire performance promised - must amount to a renunciation of the entire consideration.16

Although the instant case involved a lease of realty, the court ignored a dictum by the Supreme Court in the Auditorium case to the effect that cases arising out of the relation of landlord and tenant are distinguishable." There is a group of early cases which assume that the relation of the parties to a lease of land is severed by the bankruptcy of the lessee.18 But this assumption appears to have been definitely discarded." While the Auditorium case is generally taken to have definitely established the principle that where capital is required for performance, bankruptcy is the equivalent of an anticipatory breach of an executory lease of personalty," it left unsettled the application of

15 240 U. S. 581, 36 Sup. Ct. 412 (1916), L. R. A. 1917B 580. 16 Johnstone v. Milling, 16 Q. B. D. 460 (1886) (lessee not privileged to abandon the lease, where lessor announced his intention of not rebuilding as he had agreed); see ANSON, op. cit. supra note 11, § 383(b).

17 Supra note 15, at 590, 36 Sup. Ct. at 414 (1916). Referring to a number of landlord and tenant cases that had been cited, the court said "Cases of the latter class are distinguishable because of the 'diversity between duties which touch the realty, and the mere personalty"," citing Co. LITT. 292b, § 513.

18 In re Jefferson, 93 Fed. 948 (D. Ky. 1899); Bray v. Cobb, 100 Fed. 270 (D. N. C. 1900); In re Hays, Foster & Ward Co., supra note 8; In re Hinckel Brewing Co., 123 Fed. 942 (N. D. N. Y. 1903). For the argument of these decisions see 48 AM. L. REG. 656 (1900).

19 See Watson v. Merrill, 136 Fed. 359, 363 (C. C. A. 8th, 1905); In re Ells, 98 Fed. 967, 968 (D. Mass. 1900); Witthaus v. Zimmerman, 91 App. Div. 202, 204, 86 N. Y. Supp. 315, 317 (1st Dep't 1904); Liggett Co. v. Wilson 224 Mass. 456, 458, 113 N. E. 184, 185 (1916). In the first of these cases, Sanborn, J., remarked, "C throughout

the entire field of contractual obligations the adjudication in bankruptcy absolves from no agreement, terminates no contract, and discharges no liability."

20 Note L. R. A. 1917B 585.

torium case a conflict has arisen which perhaps can be settled only by further action by the Supreme Court. The instant case makes no mention whatsoever of this conflict and apparently ignores the limitations on the Auditorium case established by these subsequent decisions.

Viewed from a practical standpoint, however, there would seem to be a great deal of justification for the statement of the instant court that "under all the circumstances it would be unjust to force the [lessee] to vacate its present location and abide by a lease which involves so much uncertainty." The suit was brought a month after the lessee was to have been given occupancy, and none of the alterations agreed upon had even been begun. It was not improbable that the heat, light, and other service would be inadequate. The lessee was probably not yet under any necessity of moving, as he still held his unexpired lease, which the lessor had promised to assume. Furthermore, as the lease was to be operative only on completion of the alterations, they would seem to have been regarded as of vital importance by the lessee. From the lessee's standpoint, a release from the agreement seems the only satisfactory solution.

The termination of the lease, also, might be most advantageous to the lessor. The trustees no doubt relied on the

21 Supra note 17.

22 Supra note 10. The practical arguments of the Special Master in this case are undeniable.

23 Ibid. 112.

24 Wells v. Twenty-First Street Realty Co., 12 F. (2d) 237 (C. C. A. 6th, 1926). The court quoted from Gardiner v. Williams S. Butler & Co., 245 U. S. 603, 605, 38 Sup. Ct. 214 (1918): "But the law as to leases is not a matter of logic in vacuo; it is a matter of history that has not forgotten Lord Coke."

25 See (1926) 36 YALE L. J. 418.

26 Supra note 2, at 619, 130 S. E. at 924 (1925).

rule that the trustee in bankruptcy may adopt the contractual obligations of the bankrupt." The rent from the bankrupt's lessees would be a valuable asset to the estate. 28 But it seems more conservative for the trustees to lease the property to other parties, even for less rent, than to undertake such a substantial outlay of labor and expense. Indeed, where additional capital requirements are apparently necessary if the covenants in the lease are to be performed, the court would seem to be justified in refusing to reply on the trustee's assurance of their performance.

In giving a lessor of personalty a provable claim in bankruptcy for damages as for anticipatory breach, the Auditorium case opened the way for the problem in the instant case. Whether a lessor or lessee will need capital or credit faithfully to perform his part of the lease in a particular case may be arguable. Once this is determined, however, the instant court apparently seeks to provide a simple rule of administration—namely, that it will not investigate the extent of the capital requirements and the ability of the trustee to meet them, before releasing the solvent party from the lease30 a rule which it establishes a rule which it establishes as a corollary to that in the Auditorium case.

27 Watson v. Merrill, supra note 19; Ex parte Faxon, Fed. Cas. No. 4, 704 (C. C. D. Mass. 1869); cf. Notes (1902) 59 L. R. A. 673, II (a), (c); (1910) 33 L. R. A. (n. s.) 745. The supreme Court in the Auditorium case held bankruptcy to be a breach, but recognized that the trustee may adopt or assign the lease. Supra note 15 at 590, 36 Sup. Ct. at 414.

28 Cf. 1 TIFFANY, LANDLORD AND TENANT (1912) § 12 (7). 29 A diversity of agreements may be included by litigants or courts within that elastic category of contracts called "leases."

30 Assuming the correctness of this inference, query whether such a privilege of abandonment would not carry with it a right to damages for anticipatory breach under the Auditorium case.

§ 2(7) (1898), 11 U. S. C. § 11 (7) (1926); 30 STAT, 552, § 23 (b) (1898), as amended, 32 Stat. 798, §8 (1903); 36 STAT. 840, § 7 (1910), 11 U. S. C. § 46 (1926). The result of judicial legislation on this matter has been to determine that jurisdiction to act by summary process is in general based on the court's possession of the property involved. Board of Trade of Chicago v. Johnson, 264 U. S. 1 (1924); In re Smith, 18 F. (2d) 797 (W. D. Wash. 1927); see TaubelScott-Kitsmiller Co. v. Fox, 264 U. S. 426, 432-53 (1924); BLACK, BANKRUPTCY (4th ed. 1926) § 836; 1 COLLIER, BANKRUPTCY (13th ed. 1923) 771. It follows that a trustee suing to recover property in the possession of an adverse claimant at the time of the petition in bankruptcy must proceed by plenary suit. Galbraith v. Vallely, 256 U. S. 46 (1921); In re Vadner, 17 F. (2d) 721 (C. C. A. 9th, 1927); In re White Satin Mills, 25 F. (2d) 313 (D. Minn. 1928); 1 COLLIER, BANKRUPTCY 100; see Note (1928) 42 HARV. L. REV. 119, 121. In order to expedite the administration of the bankrupt's estate, however, courts have relented to the extent to sanctioning summary process where the third party's claim is not adverse or is merely colorable. Mueller v. Nugent, 184 U. S. 1 (1901); Babbitt v. Dutcher, 216 U. S. 102 (1910) Slattery v. Dillon, 17 F. (2d) 347 (C. C. A. 9th, 1926); In re White 25 F. (2d) 341 (D. Mass. 1928). Perhaps the most extreme case is a recent Supreme Court decision where summary process was in effect used to compel an assignee in insolvency to make reparation for fraudulently disposing of the property. May v. Henderson, 268 U. S. 111 (1925). Even in the light of that decision, the instant case is clearly sound, because, first, at no point of time did the debtor hold a specific res for the benefit of the bankrupt and, secondly, a non-paying debtor should not be treated like a fraudulent fiduciary, against whom summary relief may well be granted.

ANOTHER INSTANCE OF SUMMARY
JURISDICTION

This is discussed in the December issue of the Harvard Law Review.

BANKRUPTCY, PROCEDURE AND PRACTICE, COLLECTION BY SUMMARY PROCESS OF A LIQUIDATED CLAIM OWING TO THE BANKRUPT.

X had made a contract with the Y syndicate whereby he was to receive 15% of its stock. Disputes arising under this contract were being litigated when the syndicate agreed to pay X $175,000 in satisfaction of his rights, provided it secured releases from his creditors and from the assignees of his rights in the claim. X was subsequently adjudicated a bankrupt. The bankruptcy courts issued a summary order to the syndicate directing it to pay the $175,000 into court and assuming to discharge all its liabilities under the contract. The syndicate appealed. Held, Held, the bankruptcy court has no jurisdiction to order payment of a debt owing the bankrupt by summary proceedings. Order reversed. In re Roman. Ex parte Helfand, 23 F. (2d) 556 (C. C. A. 2d, 1928).

The sections of the Bankruptcy Act which give jurisdiction over suits brought by a trustee in bankruptcy to collect the bankrupt's estate do not specify under what circumstances the court may act summarily. 30 STAT. 545,

FRAUD AS BARRING DISCHARGE

In the April, 1928, issue of the Georgetown Law Journal is a note considering the effect of a fraudulent chattel mortgage as a bar to a discharge.

FRAUDULENT CHATTEL MORTGAGE AS BAR TO DISCHARGE

Bankrupt gave as security for a loan a chattel mortgage on property which he knew did not belong to him. His application for discharge from bankruptcy was objected to on the ground that he had obtained money on credit upon a materially false statement in writing within the meaning of Section 14b (3) Act July 1, 1898, as amended by the Act of June 25, 1910, Sec. 6 (11 U.S.C.A. Sec. 32). Held that such mortgage constituted a materially false statement in writing as would bar the discharge. In re Powell, 22 F. (2d) 239 (D.C. Md. 1927). Contra: In re Hudson, 262 Fed. 778 (D.C.S.D. Ala. 1920).

The statute in question, before the amendment of 1926, provided that upon an application for discharge properly made the judge should discharge the bankrupt unless, among other acts, he had "obtained money or property on credit upon a materially false statement in writing, made by him to any person or his representative for the purpose of obtaining credit from such person." In re Hudson, supra, while admitting that a materially false statement in a

mortgage deed given to secure a loan would come technically within the terms of the statute, holds that the language used denotes the ordinary credit dealings between merchant and customer, not secured debts. But the provision does include loans of money made in reliance upon materially false statements. Gerdes v. Lustgarten, 266 U.S. 321, 328, 69 L. Ed. 309, 313 (1924). Although the bankrupt gives security for the loan, if he makes a false written statement to obtain it, he will not be discharged. In re Savarese, 209 Fed. 830 (C. C. A. N. Y. 1913). In re Hudson, in support of its conclusion, stresses the fact that Sec. 17 (2) of the above statute (11 U. S. C. A. 35) excepts from a discharge any debt that is a liability for obtaining money under false pretenses, and contends that the act would not provide that a debt created by a given state of facts should be a ground for refusing a discharge and at the same time except such a debt from the discharge when granted. It has been held otherwise, however. In re Reed, 191 Fed. 920 (D. C. W. D. Okla. 1911); In re Armstrong, 248 Fed. 292 (D. C. S. D. Cal. 1918); In re Day, 268 Fed. 871 (D. C. N. D. Ga. 1920). But see In re Main, 205 Fed. 421, 423 (D. C. N. D. Ia. 1913); In re Menzin, 233 Fed. 333, 334 (D. C. S. D. N. Y. 1916).

In re Powell seems to be a better interpretation of the Bankruptcy Act. If a false written statement of general assets made to procure a loan would bar a discharge, a fortiori the discharge should be refused when the bankrupt knows the creditor will place special reliance on a statement regarding one of these assets, namely the mortgaged chattel. F. C. B.

PROVABILITY OF CONTINGENT CLAIMS

A valuable discussion on the provability of contingent claims is found in the last April issue of the Virginia Law Review, as follows:

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BANKRUPTCY PROVABILITY OF CONTINGENT CLAIMS
NEGOTIABLE INSTRUMENTS

The question of rights and remedies of bankrupt sureties on negotiable paper is one which has caused much conflict in the federal courts. This is due largely to the different interpretations which the several circuits have given to section 63a of the Bankruptcy Act of 1898,' which defines provable claims. In the acts prior to 1898, provisions were made for proof of contingent claims. The courts were agreed, under these acts, that although demands whose possible existence depended on a contingency were not provable, those whose existence were fixed, but were terminable upon a contingency, were provable. No express

1 Holding that section 63a (1) and 63a (4) are separate and distinct grounds for provable claims. Moch v. Market Street National Bank, 107 Fed. 897 (C. C. A. 3rd, 1901); In re Smith, 146 Fed. 923 (D. C. R. I. 1906). Holding that § 63a (4) is to be read in the light of § 63a (1) and that claims founded on express contract provided for in § 63a (4) must be a "fixed liability . . absolutely owing at the time of the filing of the petition." First National Bank v. Elliot, 19 Fed. (2d) 426 (C. C. A. 6th, 1927); In re Roth and Appel, 181 Fed. 667 (C. C. A. 2d, 1910).

Bankruptcy Act of 1841, § 5, 5 STAT. AT LARGE 445; Bankruptcy Act of 1867, § 19, 14 STAT. at Large 525, 526.

3 Wolf v. Stix, 99 U. S. 1 (1878); Riggan v. Magwire, 15 Wall. 549 (U. S. 1872); French v. Morse, 2 Gray 111 (Mass. 1854).

provision for such claims was made in the Bankruptcy Act of 1898, and some courts have construed this omission as a legislative exclusion of contingent claims from the classes of provable debts."

But while no express provision is made for contingent claims, there is no express prohibition directed against them. If it can be shown that a claim meets the requirements in any class enumerated in section 63a, such claim is a provable one. It should not be conclusive that such claims are not cognizable under the Act because they may be classified under another head, i.e. contingent claims, for which classification, eo nomine, Congress has made no provision.

When a business man goes bankrupt, a large part of his obligations will often consist of indorsements of commercial paper. The Bankruptcy Act, which is as much for his benefit as it is for his creditor's, would work an injustice in preventing proof of these suretyship claims against the old estate because there is a possibility that the party primarily liable will pay at maturity. Of course, no claim can be discharged unless provable, hence, by holding these claims over against his new estate, the Act would frustrate one of its purposes, that of giving the discharged bankrupt a fresh start."

The claim which a creditor holds against a bankrupt surety comes within section 63a, subdivision 4. It is an absolute undertaking by the indorser, the only contingen

In re Mullings Clothing Co., 238 Fed. 58 (C. C. A. 2d, 1916); In re American Vacuum Cleaner Co., 192 Fed. 939 (D. C. N. J. 1911); In re Roth and Appel, supra note 1.

Section 1, subdivision 11 of the Bankruptcy Act of 1898 defines a "debt" as "any debt, demand, or claim provable in bankruptcy." The most pertinent classes, to this subject, enumerated in § 63a are expressed in subdivision 1: “debts of the bankrupt may be proved and allowed against his estate which are a fixed liability whether payable or not;" and subdivision 4: "debts founded upon an open account, or upon a contract expressed or implied."

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"In the opinion in re Marks and Garson, 6 Am. Bankr. Rep. 641, 644, it is suggested, the bankruptcy acts of 1867, 1841, and 1800 contained special provisions concerning contingent liabilities, and that the present act contains no similar provisions, and is entirely silent upon that subject. It is argued, from the assumed omission, that is was intended to exclude altogether, contingent liabilities. This argument, as it seems to me, loses sight of the fact that in sub-division 4, express language is used which is broad enough to comprehend liabilities which mature by the happening of a contingency after the date of adjudication." In re Smith, 146 Fed. 923, at 925 (D. C. R. I. 1906).

7 "The primary purpose of the bankrupt act was to relieve insolvent debtors from their pecuniary liabilities, and to secure ratable distribution of their estates among their creditors. It is not, then, to be lightly believed that congress intended to exclude from the operation and benefits of the act unmatured indorsements of commercial paper, which in every commercial community so often constitute a large proportion of the indebtedness of failing debtors." Moch v. Market Street National Bank, 107 Fed. 897, at 898 (C. C. A. 3rd, 1901). "It is the purpose of the Bankrupt Act to convert the assets of the bankrupt into cash for distribution among creditors and then to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes." Williams v. United State Fidelity and Guaranty Co., 236 U. S. 549, at 554 (1915).

8 A contract created by the indorsement of commercial paper is an "express contract" and "its terms are certain, fixed, and definite." Martin v. Coe, 104 U. S. 30, at 37 (1880).

cies being dishonor at maturity by the party primarily liable, and the taking of the steps then necessary to fix the indorser's liability. The creditor takes the commercial paper as much on the contract of the indorser as on that of the maker. To throw out the creditor's claim for dividends in the estate of the bankrupt surety is as much of an injustice and deprivation to him as it is a wrong against the bankrupt to hold it over against his new estate. 10 This 10 This claim is fixed as of the date of petition for that is the absolute line of cleavage between the old and new estates.11 If contracted for at that time, the fact that it may require a few months to ascertain whether the action against him will be brought, if dishonored by the party primarily liable, is procedural only and should have no effect on the substantive rights of the parties.12

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Although the Supreme Court has never had this exact. question before it, in Dunbar v. Dunbar, it held that a contract, in which a husband agreed to pay his divorced wife a certain annuity as long as she lived without remarrying was not provable, but made this decision apparently only because the probability of her remaining unmarried was impossible of estimation and, therefore, not even an approximate valuation could be placed on the contract.14 From this it may be inferred that the Supreme Court considers a contingent claim provable when based upon an expressed or implied contract, the value of which is capable of reasonably exact estimation. It also seems probable that if the wife had remarried within the time allowed for the proof of claims and after the petition in bankruptcy, this would have fixed the claim and rendered it provable, even though at the date of petition it was still contingent. By analogy, the contingencies involved in the indorser's contract are, first, dishonor of the obligation by the party primarily liable, and second, due notice thereof to the indorser, matters which have nothing to do with the exactness of the indorser's liability, but go to the question of his possible release.

In the circuits which do not construe the Act as providing for proof of contingent claims, the decisions were in most cases based on claims not connected with negotiable paper, but rather with contingent liabilities for rent,16 and

Section 66, Negotiable Instruments Law.

10 But this is the view taken by several of the Circuits and regardless of the injustice they refuse to allow proof of suretyship claims which have not matured prior to the date of petition. See In re Roth and Appel, supra note 1; First National Bank v. Elliott, supra note 1. 11 Zavelo v. Reeves, 227 U. S. 625 (1913).

12 It would seem that the test laid down by the courts under the Bankruptcy Acts of 1941 and 1867 would be just as applicable under the present Act. In substance it is as follows: Demands whose possible existence depends on a contingency are not provable but those whose existence is fixed but the action depends on a contingency are provable. See cases cited supra note 3.

13 190 U. S. 340 (1903).

14 "Conceding that the bankruptcy act provides for discharging some classes of contingent demands or claims, this is not, in our opinion, such a demand. Even though it may be that an annuity dependent upon life is a contingent demand within the meaning of the bankruptcy act of 1898, . . . yet this contract, so far as regards the support of the wife, is not dependent upon life alone, but is to cease in case the wife remarries. Such a contingency is not one which in our opinion is within the purview of the act, because of the innate difficulty, if not impossibility, of estimating or valuing the particular contingency of widowhood." Dunbar v. Dunbar, supra note 13, at 345. 15 Supra note 4.

16 Watson v. Merrill, 136 Fed. 359 (C. C. A. 8th, 1905); In re Roth and Appel, supra note 1; In re Mullings Clothing Co., supra note 4.

in one case, future wages." It would seem that these claims are distinguishable from those based on the every day contracts of indorsement which are apt to form a large portion of a business man's financial burden.

None of the decisions have allowed proof of a claim against a bankrupt indorser unless the claim is actually fixed against him by failure of payment by the party primarily liable, within the time allowed for the proof of claims.18 It would seem that a more desirable situation would allow proof of the claim, along with others, regardless of the time of maturity. There would seem to be no really legitimate objection to the setting aside of the possible dividends on such a claim, requiring the trustee to retain them to abide the event; that is to pay them to the creditor if the liability of the bankrupt indorser be actually fixed by the dishonor of the note at maturity, and due notice thereof; if not so fixed, then to distribute the funds thus released among the other claims allowed. A procedure not dissimilar is already common where one secondarily liable on a bankrupt's obligation takes advantage of section 571, providing that the surety may prove the whole claim in the creditor's name “and if he discharges such undertaking in whole or in part he shall be subrogated to that extent to the rights of the creditor." Granted the inconvenience of keeping an estate open for such periods of time as would sometimes be necessary, this does not seem important enough to overbalance the ovbious public policy of making it possible for such an indorser to secure a discharge from these liabilities.

Most of the courts seem to hold that it is not now possible to allow dividends or any claim that is not proved as absolutely owing within six months of the date of adjudication, unless such claim is in the process of liquidation, as provided for in sections 57n" and 63b.20 If this view be adopted by the Supreme Court, then, of course, the procedure here suggested would be impossible without an amendment of the Bankruptcy Act. It is, however, certainly within the realm of possibility that the Supreme Court will find in the Act, as it now stands, powers broad enough to accomplish the desired purpose. It is hardly to be believed that Congress did not intend to make it possible for an indorser of negotiable paper to secure a discharge from his liabilities thereon, regardless of the fact that the paper would not mature until more than six months after his adjudication as a bankrupt. The spirit of the Bankruptcy Act embodies this latter view and it is submitted that when this question is presented to the Supreme Court that learned body will deem proper an interpretation which will permit proof of contingent claims against bankrupt sureties regardless of the date of maturity of the instrument. C. A. B.