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In re Diversey Bldg. Corp.

June 30, 1937


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division.

Author: Sparks

Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge.

This appeal involves the validity of a decree of the District Court, sitting in bankruptcy, holding appellants, as lessees of appellee, in default on account of nonpayment of rent under their lease. The controversy arose over the construction of a lease which provided for a minimum rental plus a percentage of the gross rentals over a certain amount, and appellants' failure to include in the monthly report called for by the lease, the value of seven apartments occupied by employees without charge to such employees. The decree awarded recovery in the sum of $4,916.44 and execution was ordered. It was further ordered that appellants pay that amount within ten days from the entry of the order, and in default thereof that they immediately surrender possession of the leased property. The decree further reserved jurisdiction of the parties and subject matter for the purpose of enforcing the order by such other and further proceedings in the premises as might be necessary and appropriate. From that decree this appeal is prosecuted.

The facts out of which this controversy arose, and upon which the referee based his conclusions, are found in a stipulation which in substance is as follows: All objections as to the jurisdiction of the court were reserved. On September 2, 1932, the Diversey Building Corporation entered into a written lease with Leo Wallach for the Diversey Arms Apartment Hotel, in Chicago, excepting all shops and stores on the main floor. Thereafter the lease was assigned by Wallach to the Six Forty-Four Diversey Parkway Corporation with the consent of the lessor. In June, 1934, the creditors of the lessor filed in the District Court a petition for the reorganization of the lessor under section 77B of the Bankruptcy Act, 11 U.S.C.A. ยง 207. On April 20, 1935, the court approved a plan, and on June 28, 1935, entered its final decree.

Wallach, and subsequently his assignee, had been in possession of the premises under the lease since September 2, 1932. During that time there were furnished to the lessor, monthly statements showing the gross income derived from the operation of the hotel, which statements did not reflect any money received from apartments occupied by employees, but they did show all other data covering the amounts which appellee would be entitled to receive under the lease. Appellee received those statements and the amounts required to be paid in accordance therewith, and at no time raised any objections as to the statements or the amounts therein shown to be due. Appellee was permitted at all times to examine appellants' books and records for the purpose of verification, and it did so from time to time, but at no time raised any objection thereto until July 6, 1935.

From September 2, 1932, to the date of the stipulation, various apartments in the hotel were occupied by appellants' employees, including the manager, engineer, telephone operator, housekeeper and seamstress, who paid no rentals therefor. Appellants' recrods truly reflected the number of apartments so occupied and those records were at all times available for appellee's unrestricted and unlimited inspection. No money was received by appellants for such use and occupation and none was reflected in the monthly statements. An average of seven apartments were thus occupied during the time referred to, and the fair rental value of each to guests of the hotel in the ordinary course of business was $35 a month. At all times there were vacant apartments in the hotel and no prospective guests were refused accommodations for lack of available apartments.

The lease was attached to the stipulation and the substance of certain portions of it which the referee considered pertinent is shown in the margin.*fn1

The final decree approving the plan of reorganization of appellee was entered June 28, 1935. Among other things it contained the following:

The debtor shall assume and perform all executory contracts and leases outstanding heretofore entered into by the debtor, or by the trustees herein.

For the determination of all matters germane to this proceeding not heretofore or hereby determined, the debtor herein or any other party in interest may apply to this court for further instructions and directions with respect to any of the matters covered in the order of confirmation heretofore entered, or by this order, or by the plan.

The court hereby reserves jurisdiction to hear and determine the subject matter of any application with respect to all other matters which may arise in the execution of said order of confirmation, or in this order, or in the consummation or carrying out of the plan of reorganization.

On July 6, 1935, appellee, as the debtor under the reorganization proceedings, filed the petition here in controversy in the court in which that proceeding was had, alleging the pendency of that proceeding by virtue of the continuing order of jurisdiction in its final decree. It further alleged, among other things, which are not here pertinent, that the lessees did not correctly set forth a true statement of the financial operation of the premises in that they did not include in their reports the income of rental of the apartments occupied by appellants' employees, of which one-half was due and owing to appellee. It therefore prayed that appellants be ordered and directed to answer the petition at an early date, and to show cause why they should not deposit with the clerk of the court the sum of $7,626.71, or in default thereof to forthwith surrender possession of the premises, and for such other and further orders as the court might deem just and proper.

On July 16, 1935, appellants, answering the order to show cause, filed their joint and several answers, in which they denied certain allegations, alleged lack of knowledge as to same, and admitted others not specifically including jurisdiction. However, they did generally deny each allegation not admitted, or not specifically denied. They set forth the lease as an exhibit and alleged other matters, all of which might properly be considered as supporting a defense on the ...

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