Enforceability of Bankruptcy Forfeiture Clauses in Commercial Leases (Queens Boulevard Wine & Liquor Corp. v. Blum)

St. John's Law Review Volume 49, Winter 1975, Number 2 Article 7 Enforceability of Bankruptcy Forfeiture Clauses in Commercial Leases (Queens Boulevard Wine & Liquor Corp. v. Blum) Joanne Welty Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Welty, Joanne (1975) "Enforceability of Bankruptcy Forfeiture Clauses in Commercial Leases (Queens Boulevard Wine & Liquor Corp. v. Blum)," St. John's Law Review: Vol. 49 : No. 2 , Article 7. Available at: https://scholarship.law.stjohns.edu/lawreview/vol49/iss2/7 This Note is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact . BANKRUPTCY LAW ENFORCEABILITY OF BANKRUPTCY FORFEITURE CLAUSES IN COMMERCIAL LEASES Queens Boulevard Wine & Liquor Corp. v. Blum A proceeding pursuant to Chapter XI of the Bankruptcy Act1 has as its primary purpose the financial rehabilitation of the debtor.2 If he is "insolvent or unable to pay his debts as they mature," 3 the debtor may file a petition with a bankruptcy court for an arrangement.4 The court, in its discretion, may either allow the debtor to continue in possession of his business or appoint a receiver to carry on the operation during the pendency of the proceeding.5 In addition, the court has the power to stay, until final decree, the maintenance of suits against the debtor." After having met with the approval of at least a majority of the creditors, the proposed arrangement must be confirmed by the court7 Upon confirmation, the plan becomes binding on general non111 U.S.C. § 701 et seq. (1970). This is a voluntary proceeding, resembling common law compositions and extensions under the former Bankruptcy Act of 1898, ch. 541, § 12, 30 Stat. 549, and the Act of March 3, 1933, ch. 204, § 74, 47 Stat. 1467, respectively. These sections were supplanted by Chapter XI of the Chandler Act. Act of June 22, 1938, ch. 575, 52 Stat. 840, 905. See generally J. WEINSTErN, THE BANKRUPTCY LAW OF 1938 (198). 2 See Nicholas v. United States, 284 U.S. 678, 687 (1966). The provisions of the Bankruptcy Act may be viewed as comprising two distinct categories. The vast majority of proceedings (Chapters I through VII) are straight bankruptcy proceedings involving the collection and distribution of all the debtor's property and his ultimate discharge. On the other hand, the Bankruptcy Act contains other provisions (Chapters VIII through XV) which contemplate the debtor's rehabilitation. Under the latter, the debtor seeks reorganization rather than liquidation, and the creditors look to the future earnings of the bankrupt, rather than the property held by him at the time of suit, to satisfy their claims. See 1 W. CormR,BANKRUPTCY 0.01 (14th ed. 1971) [hereinafter cited as CoLLiER]. See generally Ashe, Rehabilitation Under Chapter Xl: Fact or Fiction, 72 CoAs. L.J. 259 (1967). 3 Bankruptcy Act § 323, 11 U.S.C. § 723 (1970). 4 An arrangement is defined as "any plan of a debtor for the settlement, satisfaction, or extension 6f the time of payment of his unsecured debts, upon any terms." Id. § 306(1), 11 U.S.C. § 706(1). The petition seeking the arrangement must be filed in a court of bankruptcy, viz., one of the United States district courts or a district court of a territory or possession. Ad. § 1(10), 11 U.S.C. § 1(10). 51d. § 332, 11 U.S.C. § 732 (appointment of receiver or continuance of trustee in possession); Id. § 342, 11 U.S.C. § 742 (continuance of debtor in possession). 61d. § 314, 11 U.S.C. § 714. A debtor has no absolute right to a stay order. Stays are discretionary, but, as they are often essential to the enforcement of the provisions of the Act, the courts generally grant them. See In re Lieb Bros., Inc., 198 F. Supp. 229, 231 (D.N.J. 1961), citing Foust v. Munson S.S. Lines, 299 U.S. 77, 83 (1936). 7 Sections 361 and 362 of the Bankruptcy Act set forth the requirements for acceptance of the arrangement by the creditors. Bankruptcy Act §§ 361, 262, 11 U.S.C. §§ 761, 762 (1970). Section 366 further requires that the proposed arrangement be "feasible" and "for the best interests of the creditors." Id. § 366, 11 U.S.C. § 766. ST. JOHN'S LAW REVIEW [Vol. 49:271 priority creditors and, as provided for by the arrangement plan, the debtor is discharged from all of his unsecured debts.8 An arrangement contemplates the continued operation of the debtor's business in the interest of rehabilitating the debtor as well as fulfilling the expectations of his creditors. Meeting this twofold goal becomes difficult, however, when the debtor's premises are leased and the lessor seeks to terminate the leasehold interest by invoking a bankruptcy forfeiture clause in the lease.9 Where such clauses are sufficiently specific, they are enforceable by virtue of section 70(b) of the Bankruptcy Act. 10 The Second Circuit, in Queens Boulevard Wine & Liquor Corp. v. Blum,". was faced with the issue whether a bankruptcy court is required to enforce a bankruptcy forfeiture clause in a commercial lease. The district court had held that although such clauses are generally enforceable, the court may deny enforcement on purely equitable grounds where, under the particular circumstances, forfeiture would be inequitable and contrary to the purposes of Chapter XI.12 The Second Circuit, by a divided panel, affirmed the district court's determination. 13 In an opinion authored by Judge Timbers, the majority reasoned that enforcement in the instant case would frustrate the legislative intent and rehabilitative purpose of Chapter XI. 14 Although the court subscribed to the general enforceability of bankruptcy clauses and limited 8 Id. § 367, 11 U.S.C. § 767. Unless the court or 'the arrangement plan itself provides otherwise, id. § 368, 11 U.S.C. § 768, the case is dismissed upon confirmation of the arrangement. The creditors, whether they have consented to the arrangement or not, are bound by its provisions and have no further claim to the balance of the original debts. Subsection 2 of § 367 provides that priority debts are unaffected by the confirmation. Id. § 367(2) 11 U.S.C. § 767(2). 9 A bankruptcy clause is a standard lease provision. While there is some variation as to the wording of the condition, such clauses usually provide for automatic termination or termination at the option of the landlord upon the insolvency or bankruptcy of the tenant. See, e.g., Finn v. Meighan, 325 U.S. 300 (1945) (termination of lease upon lessee's filing of petition in bankruptcy); In re Technical Marine Maintenance Co., 169 F.2d 548 (3d Cir. 1958) (lessor had option to terminate in event tenant should be adjudicated a bankrupt or take advantage of any insolvency act); Jandrew v. Bouche, 29 F.2d 346 (5th Cir. 1928) (automatic termination upon transfer of the lease into the hands of the t (...truncated)