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In re Plywood Co.

decided: April 24, 1970.

IN THE MATTER OF THE PLYWOOD COMPANY OF PENNSYLVANIA, THE PLYWOOD COMPANY OF PENNSYLVANIA, DEBTOR, APPELLANT


Seitz, Van Dusen, and Adams, Circuit Judges.

Author: Adams

Opinion OF THE COURT

ADAMS, Circuit Judge.

The entangled problems so often present when rent claims are asserted in bankruptcy proceedings confront us in this case. Here, we are called upon to determine whether a landlord may retain security deposits and also recover additional damages for loss of future rental in a proceeding under Chapter XI, when a lease with a tenant contains a provision for security deposits, denominated "liquidated damages."

The Plywood Company of Pennsylvania entered into a five year lease for commercial property located in New Jersey, at a monthly rental of $750. Under the terms of the lease, Plywood deposited with the lessor $1,500 as rent security and $750 as security for damages, a total of $2,250, the equivalent of three months rent. The parties stipulated that the lease should be interpreted and enforced under the laws of New Jersey. The lease commenced on July 1, 1966, and was to terminate June 30, 1971. On July 6, 1967, Plywood initiated proceedings for an arrangement under Chapter XI of the Bankruptcy Act. Cynwyd Investments, a co-partnership, acquired the property at a settlement held August 3, 1967.

When the petition under Chapter XI was filed, Plywood owed $150 in rent for the period July 1, 1967, to July 6, 1967, the date of filing the petition for an arrangement. The Receiver appointed during the arrangement proceeding remained in possession of the premises until September 30, 1967, when he surrendered the property. On October 28, 1967, Cynwyd rented the premises to another tenant. Under the terms of the new lease, which was for ten years, the monthly rental was $875, an increase of $125 above the rental provided in the Plywood lease. The new tenant was authorized to take possession immediately, but the rent was to commence January 1, 1968. The new tenant was to alter the premises in accordance with its own specifications. There was testimony that the tenant would not execute the lease unless there was a satisfactory provision for alterations, and unless his rent would not begin until January 1, 1968. There was also testimony that the increased rent over the period of the new lease was absorbed by the portion of the cost of alterations paid by Cynwyd.*fn1

Cynwyd filed three claims in the proceeding:

1. $150 for rent accrued prior to the initiation of the Chapter XI proceeding (July 1 to July 6, 1967).

2. $2,100 for use and occupation by the Receiver (July 6 to September 30, 1967).

3. $2,250 for damages in lieu of rent from the date the Receiver surrendered the premises to the date rent commenced under the new lease (September 30, 1967 to January 1, 1968).*fn2

The first two items were asserted as priority claims; the third as a general claim.

The Referee in Bankruptcy allowed these three claims, and refused to apply the $2,250 security deposits, paid to the lessor when the lease was executed, as a set-off of the first two claims, or to cancel the $2,250 general claim. The District Court affirmed the order of the Referee, and the appeal of Plywood followed.

Plywood does not dispute the validity of Cynwyd's first two claims. It contends, however, that the higher rental of the new lease precludes Cynwyd's claim for damages after September 30, 1967, since it sustained no damages, and that the security deposits, totalling $2,250, should be used to offset the first two claims.*fn3

The Referee's decision denying Plywood credit for its security deposits against Cynwyd's claim for use and occupancy by the Receiver was based on the rationale that under ยง 68(a) of the Bankruptcy Act*fn4 there can be no set-off of claims which are not mutual, and that the claim of Plywood for the return of the deposits and that of Cynwyd for the use and occupation of the Receiver were not mutual since the use and occupation claim was an administrative expense which did not bear any relation to the lease. The Referee refused to deduct the security deposits from Cynwyd's general claim because he held ...


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