Opinion
No. 96 CIV. 4267 (RPP)
September 26, 1996
OPINION AND ORDER
Appellants TRST New York, Inc., LAFP New York, Inc. and The Alaskan Permanent Fund, (collectively, "landlord") appeal from an order of the United States Bankruptcy Court for the Southern District of New York, granting in part and denying in part their application for the rent reserved under their lease with appellee B. B. Ballew Sales Co., Inc. ("debtor") under Bankruptcy Code 11 U.S.C. § 365(d)(3)-(4). The bankruptcy court's decision is hereby reversed.
BACKGROUND
The facts of this case are not in dispute. On July 3, 1995, the debtor commenced bankruptcy proceedings by filing a voluntary petition for relief under Chapter 11. It vacated the premises in question by letter dated July 18, 1995, returning the keys and notifying the landlord of its intent to terminate the unexpired lease.
The debtor served a notice of motion, dated August 8, 1995, for a court order authorizing debtor to reject its unexpired, non-residential lease pursuant to 11 U.S.C. § 365(a). That section of the bankruptcy code provides that a bankruptcy trustee, "subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." The notice of motion set a hearing date of October 17, 1995. On October 17, 1995, counsel for the landlord appeared, explained it was not bankruptcy counsel, and requested adjournment to permit bankruptcy counsel to review the motion. The court declined to adjourn the hearing, and granted the relief requested, but ordered the debtor to settle the order on ten days notice so that the landlord could have an opportunity to review and raise any issues related to the relief requested in the order. (Transcript of October 17, 1995 Hearing, Record on Appeal, "R-3".)
Under Chapter 11, a debtor-in-possession has essentially the same rights, powers, and duties as a trustee, except for compensation. 11 U.S.C. § 1107(a).
On November 9, 1995, Bankruptcy Judge Lifland signed the proposed order rejecting the lease. (November 9, 1995 Order, R-4.) The Nov. 9, 1995 order stated, "Debtor's unexpired, non-residential real property lease for the premises . . . be, and hereby is, rejected."
On April 1, 1996, the landlord filed a motion pursuant to § 365(d)(3) of the bankruptcy code for payment as an administrative expense of $55,416.66, the rent amount due under the unexpired lease for the sixty-day period that began with the filing of the Chapter 11 petition on July 3, 1995. (Notice of Motion and Request for Payment of an Administrative Expense and to Modify the Automatic Stay, R-6 at 2.) Section 365(d)(3) states that the debtor "shall timely perform all the obligations . . . arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected. . . ."
The time period for the debtor to assume or reject the lease is limited to sixty days. Upon the expiration of sixty days, if the debtor has not acted, the lease is deemed rejected. 11 U.S.C. § 365(d)(4).
The debtor opposed this motion, arguing that the lease was effectively rejected on July 18, 1995, when the landlord was notified of debtor's intention to terminate its lease obligations, and thus the rejection ordered on November 19, 1995 should be applied nunc pro tunc to July 18. (Debtor's Reply and Incorporated Memorandum of Law, R-8 at 4-5.) Debtor argued it should only be responsible for its lease obligations under § 365(a) for the fifteen-day period between filing the order for Chapter 11 relief on July 3 and notifying the landlord of its intent to terminate the lease on July 18.
At a hearing on April 22, 1996, requested by the landlord to contest this retroactive application, the bankruptcy judge agreed with the landlord that its claim for rent for the sixty-day period should be treated as an administrative expense (Transcript of April 22, 1996 Hearing, R-10 at 21), but declared the landlord was only entitled to the rent provided for under the lease up to July 18. (Id. at 20.) For the period between July 18 and September 3, the remainder of the sixty-day period, the bankruptcy judge held that the landlord would only be entitled to the benefit obtained by the estate, i.e., the debtor's "use and occupancy of an empty place where the landlord has the keys". (Id. at 22.) Judge Lifland noted that the proposed order of November 9, 1995 which authorized the rejection of the lease, did not mention any nunc pro tunc effect of that rejection. He stated that counsel for the landlord should have noted that the application supporting the notice of motion of August 8, 1995, set for hearing on October 17, 1995, did request the nunc pro tunc effect of that rejection. (Id. at 16-18.)
This appeal occurred before that amount was determined. (Motion for Reargument of 4/22/96 Order, R-15 at 3.) However, it is understood to be for less than the rent provided for under the lease, and the appellee does not argue that the appeal is premature.
This appeal followed.
DISCUSSION
Debtor cites only one case to support its position that its full contract rent is an administrative claim under the statute for only the portion of the sixty-day period during which it occupied the premises, and that landlord must make a showing of benefit to the debtor in order to obtain rent payments for the remainder of that period. In re Orvco, 95 B.R. 724 (Bankr. 9th Cir. 1989). In Orvco, a bankruptcy appellate panel found that once a debtor vacated the premises, the rent was no longer a statutory administrative claim, and the lessor then had the burden of showing the benefit to the debtor and the amount owed on the rent for the remainder of the sixty-day period in order to receive rent payments. Id. at 727-28. Orvco, however, was expressly rejected by the Ninth Circuit inIn re Pacific-Atlantic Trading Co. v. Chickering Gregory, 27 F.3d 401 (9th Cir. 1994), which found "[t]his result [in Orvco] is wholly inconsistent with the mandate of § 365(d)(3)." Id. at 404. ThePacific-Atlantic court determined that "[t]he plain and unconditional language of the statute demands that a trustee promptly pay the full amount of rent due under a nonresidential real property lease during the 60-day period pending assumption or rejection." Id.
Orvco's holding regarding the rate at which rent should be measured during the sixty days between the filing for bankruptcy relief and the order of rejection has also been rejected in this district, by In re Wingspread, 116 B.R. 915 (Bankr.S.D.N.Y. 1990). In that case, Bankruptcy Judge Brozman disagreed with Orvco's interpretation of § 365(d)(3), finding that "irrespective of whether the payments required under the lease meet the usual requirements for administrative status, reasonableness and benefit to the estate, they are unconditionally due. . ." Id. at 926.
The Wingspread opinion outlined the legislative history of § 365(d)(3) in support of its position. Prior to the amendment of § 365 in 1984, a lessor was entitled to recover only the actual value of the property to the debtor, which the lessor had the burden of proving under § 503(b)(1)(A), which gives the bankruptcy court the equitable discretion to make administrative claim determinations based on "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered." Id.; see, e.g., T.N. Communications Corp. v. Adwar Video Corp. (In re Adwar Video Corp.), 38 B.R. 628 (Bankr.S.D.N.Y. 1984). The 1984 amendments were designed in part to protect landlords from the effects of that approach, which required the landlord to provide full services during this period even though the debtor might not be paying rent. In re Wingspread 116 B.R. at 926; see also In re Thinking Machines, 67 F.3d 1021, 1023-4 (1st Cir. 1995); In re Pacific-Atlantic 27 F.3d at 403. The 1984 amendments required court approval for rejection of a lease, guaranteeing the landlord full contract rent up until the time the lease is rejected by court order, "even where the debtor had vacated or was not using all of the leasehold premises during the postpetition, pre-rejection period." In re Wingspread, 116 B.R. at 925.
Debtor also argues that regardless of when the lease was deemed rejected, the bankruptcy judge was correct in modifying the amount owed to the landlord because of the landlord's delay in contesting the original order of rejection. The debtor relies on In re Jamesway Corp., 179 B.R. 33 (S.D.N.Y. 1995), which Judge Lifland relied on in oral argument, in which Judge Leisure denied a landlord's appeal of a bankruptcy court's retroactive application of a rejection order. Judge Leisure found that the statute did not preclude such a retroactive application under the facts of that case, as "[§ 365] merely states that rejection of an unexpired lease is subject to court approval. It does not state that rejection cannot be applied retroactively, or that there are restrictions as to the manner in which the court can approve rejection." In re Jamesway, 179 B.R. at 37. The Jamesway opinion also stated, however, that in order to uphold a bankruptcy judge's retroactive application of a lease rejection, the district court judge must make a preliminary de novo finding that the statute permits the bankruptcy judge to equitably determine that rejection should apply retroactively. In re Jamesway, 116 B.R. at 36.
The bankruptcy court could not make a finding in this case that the statute permitted it to make an equitable determination regarding rent during the sixty-day period. Section 365(d) is clear in its command that the debtor is responsible for full rent for the entire sixty-day period.Jamesway dealt with a nunc pro tunc application of a rejection of the lease that took place after the expiration of the sixty-day period. Id. at 34. Furthermore, the Jamesway opinion stated that it "reache[d] its decision without determining whether, absent a landlord's responsibility for delay, a bankruptcy court is permitted to retroactively apply rejection." Id. at 37. Unlike the landlord in Jamesway, the landlord in this case was not responsible for the delay in obtaining the court order of rejection. It was the debtor who noticed the hearing on the order for rejection for October 17, 1995, over two months after it had moved for the order on August 8. It was thus due to the debtor, not the landlord, that the lease was not rejected until long after the statutory sixty days had expired.
CONCLUSION
The bankruptcy court's order denying the landlord's administrative expense claim for rent reserved under the lease for the sixty-day period after the commencement of the Chapter 11 proceeding is reversed.
IT IS SO ORDERED.