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In re Chicago

decided: June 24, 1986.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 75 B 2697 - Frank J. McGarr, Chief Judge

Before Posner and Easterbrook, Circuit Judges, and Campbell, Senior District Judge.*fn*

Author: Easterbrook

EASTERBROOK, Circuit Judge.

The Rock Island line was a landlord as well as a railroad. It rented land on which the tenants built grain elevators, among other things. Many of these leases were terminable on 30 days' notice, which exposed the elevator operators to a risk: the Rock Island might cancel, acquire ownership of the elevators, and lease the land for a much higher rent reflecting the value of the elevators the tenants had built. (The tenants had 10 days after the end of the lease to remove their improvements, after which the Rock Island acquired ownership. Few people recall seeing grain elevators rolling down the highway en route to new sites after being evicted from their old ones.) Iowa controlled the rent for the Rock Island's land, however, which made it impossible for the Rock Island to take advantage of the elevator operators in this way.

The Rock Island's bankruptcy presented it with an opportunity to turn the screws on its lessees. The Iowa statute applied only to lessees of railroads, and in 1980 the district judge supervising the Rock Island's bankruptcy instructed it to stop being a railroad. It did, and its Trustee--told to maximize the value of the estate without regard to good business relations--proposed large increases in the rent of the land underlying many grain elevators. Negotiating to avoid stupendous increases in rent, many of the elevator operators bought the underlying land from the Rock Island at prices that reflected part or all of the value of the elevators themselves.

When the Trustee increased one lessee's rent by 5900% from $100 to $6,000 per month, the lessee balked. It declined to pay, vacate, or buy at the Trustee's price. See In re Chicago, Rock Island & Pacific R.R., 753 F.2d 56 (7th Cir. 1985) (Rake). Rake held that the district court could not allow the Trustee to charge a rent based on the value of the grain elevator. Instead, "the unimproved value of the . . . property provides the better basis for an equity court to determine the fair rent" the Trustee may charge. 753 F.2d at 60. The limitation on the maximum rent affected the price the Trustee could expect to realize in a sale of the same property.

In mid-1982, before we decided Rake, Iowa extended its rent control law to railroads' successors. This closed the window of opportunity for the Rock Island, restoring the system that had been interrupted by the Rock Island's transition from railroad to real estate magnate. The reorganization court held the statute preempted by the bankruptcy laws on the ground that it reduced the value of the estate. We disagreed, because rent control of grain elevators has been constitutional since Munn v. Illinois, 94 U.S. 113, 24 L. Ed. 77 (1876), and a bankrupt's property rights are governed by state law. In re Chicago, Rock Island & Pacific R.R., 772 F.2d 299 (7th Cir. 1985), cert. denied, 475 U.S. 1047, 106 S. Ct. 1265, 89 L. Ed. 2d 574 (1986) (Sanborn I). If a going railroad may be burdened with a rent control scheme, so may a defunct railroad. Iowa's statute reduced the price the Trustee could realize, but a statute forbidding the Trustee to build a casino or dump radioactive waist on the land would have done the same.


Between the decisions in Rake and Sanborn I, the district court entered the order before us today. The dispute concerns the same land that was at stake in Sanborn I. The Sanborn Cooperative Grain Company leased 4.4 acres in Melvin, Iowa, from the Rock Island and built a grain elevator. The lease could be canceled by either party on 30 days' notice. The going rental was $2,404.65 per year. In September 1982 the Trustee gave the 30 days' notice and informed Sanborn that on November 1, 1982, it could either pay a new rent of $2,450 per month or quit the property. Sanborn refused to pay, and the parties agreed that Sanborn could remain in possession pending a sale of the land, which everyone assumed would be to Sanborn. They also agreed that the court would fix the rent for the period before the sale.

Robert Kent topped Sanborn's bid, and the Trustee sold the land to Kent on November 1, 1983, for $100,000. (Kent paid $120,000 for two parcels and apportioned $100,000 to the Melvin parcel. We need not decide whether the lopsided apportionment was justified.) Kent demanded a rent of $2,400 per month. Sanborn then invoked the new rent control law, and Iowa officials set a rent of $2,025 per year, leading Kent to seek the reorganization court's aid. This produced Sanborn I. Meanwhile the court wound up the Rock Island bankruptcy. The Rock Island, renamed Chicago Pacific Corporation (CPC), emerged as a solvent firm. The closing order preserved for decision any pending controversies, and the dispute about the rent for the Melvin property between November 1, 1982 and November 1, 1983, is such a controversy. Sanborn was a holdover tenant, and the dispute about what it would pay before the sale to Kent was an adversary proceeding in the bankruptcy. The court also concluded that it was entitled to fix the rent Kent would receive from the time it bought the land until Sanborn paid up or got out. This raises a jurisdictional problem discussed below.

By the time the court conducted a valuation proceeding, Rake had held that the appropriate rental is based on the value of unoccupied land. Sanborn presented a real estate appraiser who concluded that 4.4 acres of unimproved land at the site of the elevator was worth $15,000 in 1982-83. CPC presented evidence that vacant land in Melvin was worth $3,000 to $4,000 per acre, essentially agreeing with Sanborn's expert. But CPC argued that the appropriate way to value the land was to examine the price the Trustee had realized when selling land to the operator-lessees of other elevators. These deals, CPC insisted, show that the market value of the land was $147,000.

The reorganization court fixed the value at $125,000, stating:

The first contention of Sanborn, that is that the property should be valued as vacant, is inconsistent with the realities of the situation. The property is not vacant but in fact is a tract containing a grain elevator. It is because it contains a grain elevator that it was valuable to Sanborn and is now valuable to Kent.

The judge applied CPC's preferred method of comparing the Melvin elevator with comparable ones, although the judge did not explain why he picked $125,000 rather than the higher value for which CPC contended or the lower price Kent had paid for the parcel. (An actual price, such as Kent's, is a far better indicator of the value of this parcel than is a hypothetical price based on sales of other parcels.) The court concluded that a landlord would collect an annual rent of 20% of the market value of the land, here $26,250. It gave Sanborn credit for some prepaid rent at the old rate and directed it to pay CPC a net of $23,845.35 for the period before November 1, 1983. Then the court decreed Sanborn's rent to Kent to be $29,400 per year, from November 1, 1983, ...

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