Palmer v. Connecticut Railway & Lighting Company/Dissent Frankfurter

by Stanley Forman Reed

United States Supreme Court

311 U.S. 544

Palmer  v.  Connecticut Railway & Lighting Company

 Argued: Nov. 15, 1940. --- Decided: Jan 6, 1941

Mr. Justice FRANKFURTER dissenting.

On January 3, 1939, this Court unanimously decided that the 'actual damage or injury' caused the lessor through the disaffirmance by the trustees of the New Haven of the lease now in controversy was a provable claim. Connecticut Ry. & Lighting Co. v. Palmer, 305 U.S. 493, 59 S.Ct. 316, 83 L.Ed. 309. If Congress had intended to rule out the legal provability of a claim for damages arising through the disaffirmance of what remains of a 999-year lease it could easily have done so, instead of providing for proof of the damages flowing from the termination of such an unexpired lease. And if, upon the prior consideration of the status of this very lease, this Court had intended to rule that loss due to the disaffirmance of the unexpired term of 969 years is in the nature of things beyond rational proof, it surely would not have taken twelve pages to avoid saying so. Both Congress and this Court have thus sponsored the conviction that proof of some damage is not outside the adjudicatory process.

But what is to be assessed is the value of a terminated long-term lease and not the value of an included short-term. Therefore, neither the decision of the district court nor that of the circuit court of appeals in reversing it seems to me satisfactory. Although the two courts reached contradictory conclusions, their views appear to suffer from the same intrinsic vice. Starting with man's inability to pierce into a future of 969 years, both courts deemed the present value of a lease running for such a period beyond calculable forecast. Therefore, Judge Hincks said in effect, when an end is put to the benefits accruing from such a lease, the loss to the lessor cannot be translated into dollars and cents. Judge Patterson, on the other hand, treated the lease as though it were a lease for an ascertainable, included short term, and deemed eleven years as the limit for sure judgment. Since the lease is not a short-term lease, it is, according to the district court, nothing for purpose of giving rise to damages. Since the lease is for too long a term, we will snip off an included short term as though it were a short-term lease, concluded the circuit court of appeals.

Both these dispositions result in avoidance, through over-simplification, of an extremely complicated problem which Congress has put up to the courts. Since neither the district court nor the circuit court of appeals applied the directions of this Court in Connecticut Ry. & Lighting Co. v. Palmer, supra, however difficult and subtle they may have been, neither disposition should stand. The case should be sent back to the district court where an opportunity should be given to make proofs appropriate to the nature of the problem to be solved, namely, ascertainment on a tough business basis of the damage that sprang into existence from the disaffirmance of the remaining 969-year term rather than from the disaffirmance of a supposed 11-year lease.

Mr. Justice DOUGLAS, dissenting.

Mr. Justice BLACK and I and of the view that respondent's proof was wholly inadequate to establish under § 77, sub. b, of the Bankruptcy Act, 11 U.S.C.A. § 205, sub. b, the extent of its 'actual damage or injury' as a result of the rejection of this lease, since the evidence offered failed to show what was 'the present value of the rent reserved less the present rental value. of the remainder of the term'-the measure of damages established for this very claim in Connecticut Railway & Lighting Company v. Palmer, 305 U.S. 493, 504, 59 S.Ct. 316, 323, 83 L.Ed. 309.

We are dealing here with an unexpired term of 969 years. But the claim allowed is for a term which does not cover that span. It covers only an unexpired term of 11 years. For the reasons stated in Kuehner v. Irving Trust Co., 299 U.S. 445, 57 S.Ct. 298, 81 L.Ed. 340, we think that if Congress had provided in § 77 that lessors should not be allowed to prove for damages in excess of an 11 year unexpired term, the limitation would be constitutional. Such legislation would have a firm constitutional basis in the bankruptcy power. But the making of such a limitation is a legislative, not a judicial, function. In view of the wording of § 77, sub. b, we do not think this Court has the power to substitute the value of one property interest for the value of an entirely different one. Sec. 77, sub. b, says that 'actual damage or injury' shall be allowed. Yet it would be a mere coincidence if 'actual damage or injury' for an 11 year term were the 'actual damage or injury' for a 969 year term. Hence the District Court correctly refused to substitute any lesser term for the one here in question. No authority, we believe, can be found which can justify speculating a claimant into a loss through the easy assumption that he had a property interest which in fact he did not have.

There is a related objection to the allowance of this claim. It is plain that any attempted computation of future rental values of this property for the next 969 years would at best be a mere flight 'into the realm of pure speculation' which this Court condemned when the case was here before. 305 U.S. 493, 505, 59 S.Ct. 316, 324, 83 L.Ed. 309. From our point in history 969 years hence is perpetuity. It covers a longer span than from 1941 A.D. to 500 years before Columbus discovered America. To project past earnings of a present enterprise through such vicissitudes of time would be to assume a static quality in society which even a decade of history would disprove. This was tacitly admitted by respondent before the District Court. The Circuit Court of Appeals recognized the impossibility of such a task. It therefore produced a substitute method. It computed the annual estimated values for each future year for as long a period as it could venture an estimate. That, however, misses the nature of the problem. Under the rule laid down by this Court, the great unknown in such cases is the 'present rental value of the remainder of the term.' The actual damage, if any, to the lessor is suffered all at once. For § 77, like former § 77B, 11 U.S.C.A. § 207 (City Bank Farmers Trust Co. v. Irving Trust Co., 299 U.S. 433, 440, 57 S.Ct. 292, 295, 81 L.Ed. 324) extends the doctrine of anticipatory breach (Central Trust Co. v. Chicago Auditorium Association, 240 U.S. 581, 36 S.Ct. 412, 60 L.Ed. 811, L.R.A.1917B, 580) to leases of realty. Where there is such a breach 'compensation therefor may be recovered at once for the whole loss, though the consequence be a continuing one, if the future damage resulting therefrom can be ascertained with certainty.' James v. Kibler's Adm'r, 94 Va. 165, 173, 26 S.E. 417, 418. The liability of the lessee for damages is single, knot multiple. But § 77, sub. b, unlike some state rules (Hermitage Co. v. Levine, 248 N.Y. 333, 162 N.E. 97, 59 A.L.R. 1015), calls for an ascertainment of the full deficiency not at the end of the term but on rejection of the lease.

Lessors claiming damages under § 77, sub. b, like claimants in ordinary bankruptcy proceedings (Rasmussen v. Gresly, 8 Cir., 77 F.2d 252, 254; Whitney v. Dresser, 200 U.S. 532, 26 S.Ct. 316, 50 L.Ed. 584), carry the burden of establishing the existence and amount of the claim. Their proof must satisfy the 'usual rules as to the measure of damages'; they 'must show damages to reasonable certainty'. Connecticut Railway & Lighting Company v. Palmer, supra, 305 U.S. at page 505, 59 S.Ct. at page 324, 83 L.Ed. 309. While absolute certainty is not required where a claim for damages is sought (Hetzel v. Baltimore & Ohio R. Co., 169 U.S. 26, 37, 18 S.Ct. 255, 259, 42 L.Ed. 648), the evidence must be sufficient for the exercise of an informed judgment as to the amount. Where the existence or extent of the damage is a matter of mere conjecture or guess work, the claim will be denied. Pennsylvania Steel Co. v. New York City R. Co., 2 Cir., 198 F. 721, 759. When the instant case was here before, the Pennsylvania Steel Co. case was cited for the statement, 'The difficulties of proof are well recognized.' 305 U.S. at page 504, 59 S.Ct. at page 324, 83 L.Ed. 309. In the Pennsylvania Steel Co. case damages for breach of a lease with an unexpired term of 995 years were disallowed in receivership proceedings, the court saying (198 F. at page 759): 'Who could foretell the results of operation by the owner, the growth of the city, improvements in motive power, or reductions in cost? Who could foresee whether a lease could be made to another railroad company or the terms thereof? * * * The claim for such damages was properly disallowed because it was uncertain in amount and there was no method of making it certain.'

Those observations are peculiarly apt when applied to the facts in this record. Here there is no evidence as to market value. Cf. Metropolitan Bldg. Co. v. King County, 62 Wash. 409, 113 P. 1114, Ann.Cas.1912C, 943. Nor has there been any fair, bona fide reletting. Cf. James v. Kibler's Adm'r, supra. In this record there is no substantial evidence as to value except estimated past earnings. Useful as past earnings may be in certain situations where a short and limited forecast is being made (Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359, 47 S.Ct. 400, 71 L.Ed. 684) they are indeed treacherous when used as the sole basis for appraisal. ^[1] The value of a going enterprise is dependent on earnings. A forecast of earnings must take into consideration the numerous and variable factors which affect income-producing capacity. ^[2] Those factors vary from business to business. Here we are dealing with passenger transportation by bus. Certainly any forecast of earnings should embrace an expert study of problems peculiar to this field-the territory served, population trends, competitive conditions, the record of companies in comparable territory, and the like. Any estimate which wholly ignores such factors and relies entirely on past earnings ignores the very conditions which alone can impeach or sustain the credibility of past earnings as a measure of future earnings. ^[3] Cf. Hammond Lumber Co. v. County of Los Angeles, 104 Cal.App. 235, 285 P. 896.

The problem of determining the present value of this unexpired term of 969 years is not different from the problem of valuing a fee interest.

The fact that this instrument is called a 'lease' is no barrier to such an appraisal. For, as stated by this Court in Union Pacific R. Co. v. Chicago, Rock Island & Pacific R. Co., 163 U.S. 564, 582, 16 S.Ct. 1173, 1180, 41 L.Ed. 265, where a so-called 'lease' was construed: 'What it was styled by the parties does not determine its character or their legal relations.' The court has not only the power but the duty to determine its real character by consideration of all its intrinsic and extrinsic characteristics. Id., 163 U.S. at page 582, 16 S.Ct. at page 1180, 41 L.Ed. 265. A lease renewable forever or a lease in perpetuity (as here) is the equivalent of a fee interest. It has been so treated in Connecticut, where the instant lease was made, for purposes of taxation. Connecticut Spiritualist Camp-Meeting Association v. Town of East Lyme, 54 Conn. 152, 155, 156, 5 A. 849. As stated in Piper v. Meredith, 83 N.H. 107, 110, 139 A. 294, 296, 55 A.L.R. 148, 'it is well settled law that a perpetual lease upon condition conveys to the lessee a determinable or base fee.' Or as stated in Whittelsey v. Porter, 82 Conn. 95, 102, 72 A. 593, 596, a 999 year lease is 'practically a fee defeasible only upon failure to perform certain conditions.' And see Montgomery v. Town of Branford, 107 Conn. 697, 702, 142 A. 574; Wells v. Savannah, 181 U.S. 531, 21 S.Ct. 697, 45 L.Ed. 986; Leary v. Jersey City, 248 U.S. 328, 39 S.Ct. 115, 63 L.Ed. 271; Trustees of Elmira v. Dunn, 22 Barb., N.Y., 402. The mere reversionary interest of the lessor in a perpetual lease is so remote and speculative as to defy valuation. See Chicago West Division R. Co. v. Metropolitan West Side Elevated R. Co., 152 Ill. 519, 524-526, 38 N.E. 736. As stated by the Supreme Court of Errors of Connecticut, the reversion under a 999 year lease becomes a 'mere imaginary estate'. Brainard v. Town of Colchester, 31 Conn. 407, 411. Whatever may be the precise catalogue of all rights of the lessee (Goodwin v. Goodwin, 33 Conn. 314; Dennis' Appeal, 72 Conn. 369, 44 A. 545) and whatever may have been the business and legal reasons for use of the 999 year lease rather than the acquisition of the assets by merger, consolidation or otherwise, ^[4] it is plain that for all practical purposes the lessee retains such full control and such complete enjoyment of the property that he may properly be treated as the owner. Such a lease is in effect 'a practical sale'. Lord v. Town of Litchfield, 36 Conn. 116, 126, 4 Am.Rep. 41.

Thus the problem of determining the present value of the unexpired term of 969 years is no different from determining the value of land in an action for breach of a contract to purchase it. There the rule is that the vendor may recover compensation for his actual loss measured by the difference between the price he was to receive ^[5] (less the amount paid) and the value of the land at the time of breach. 3 Sedgwick on Damages, 9th Ed., §§ 1023 et seq.; In re Marshall's Garage, 2 Cir., 63 F.2d 759. In making that valuation the conventional rules governing appraisals of the worth of fee interests would be applicable. 1 Bonbright, Valuation of Property, chs. XIII, XIV.

In sum, whatever rule of damages is applied to this situation, the proof submitted is not adequate for appraisal of the property interest here involved without violating the well-established rule against allowance of speculative damages, announced by this Court on the first appeal. No reasons of policy have been suggested which justify deviation from those well-established principles. The fact that the 'lease' extends over a period of almost ten centuries accentuates the necessity for close adherence to the rule, not for its relaxation.

Notes

1. 1 Bonbright, Valuation of Property, c. XII.
2. Bonbright, op. cit., supra, note 1; Dewing, Financial Policy of Corporations, pp. 319 et seq.; Graham & Dodd, Security Analysis, c. I; Kniskern, Real Estate Appraisal & Valuation, pp. 235 et seq.; Mason, The Street Railway in Massachusetts, c. 6; McMichael, Long & Short Term Leaseholds.
3. In the Matter of Breeze Corporations, Inc., 3 S.E.C.D. & R. 709; In the Matter of Mining & Development Corp., 1 S.E.C.D. & R. 786.
4. McMichael, op. cit., supra, note 2, c. I; Meck & Masten, Railroad Leases and Reorganization, 49 Yale L.J. 626; Niehuss & Fisher, Problems of Long Term Leases, 2 Mich.Bus Studies, Pamphlet 8; The Long Term Ground Lease: A Survey, 48 Yale L.J. 1400.
5. Future payments would of course be reduced to present worth. Bondy v. Harvey, 218 App.Div. 126, 217 N.Y.S. 877.