Opinion
Case Nos. 99-28923-L through 99-29025-L, Case Nos. 99-30101-L through 99-30125-L Jointly Administered, Case No. 99-28941-L.
December 13, 2004
MEMORANDUM AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
BEFORE THE COURT are the motion for summary judgment filed by the Debtor, Medshares, Inc. of Utah, and the cross motion for summary judgment filed by HCA Inc., f/k/a HCA — The Healthcare Company, formerly Columbia/HCA Healthcare Corporation, and its affiliates (collectively, "HCA"). The motions relate to two underlying motions filed October 16, 2000, by HCA for allowance of administrative expense claims against the Debtor in the amounts of $92,185.60 and $37,736.28 for leases of premises used as home health agencies in Salt Lake City, Utah. National Century Financial Enterprises ("NCFE"), the holder of certain pre- and post-petition claims against the Debtor's bankruptcy estate, has filed a response in support of the Debtor's motion. Both the Debtor and HCA contend that there are no genuine issues of material fact remaining to be resolved, but each asserts that it is entitled to judgment as a matter of law. This is a core proceeding. 28 U.S.C. § 157(b)(2)(B).
FACTS
The following facts are undisputed. On September 23, 1998, HCA and Medshares Consolidated, Inc. ("Medshares") entered into an Asset Purchase Agreement ("APA") providing for the purchase and sale of certain home health agencies owned and operated by HCA, including Columbia Healthcare Utah, owned and operated by Northern Utah Healthcare Corporation, a subsidiary of HCA; and Infusamed, owned and operated by HTI of Utah, Inc., a subsidiary of HCA (collectively, the "Utah Home Health Agencies").
Columbia Healthcare Utah — Vine Street Lease
The original lease for Columbia Healthcare Utah is dated April 18, 1996 (the "Vine Street Lease"). The parties are JJB Properties, Inc., as landlord (the "Vine Street Landlord") and HCA Health Services of Utah, Inc., d/b/a St. Marks Hospital, a Utah corporation, as tenants (the "Prior HCA Vine Street Tenant"). By its terms, the Vine Street Lease expired on August 31, 1998. Since the Debtor does not dispute the validity of the Vine Street Lease or the fact that it occupied the Vine Street Premises pursuant to the Vine Street Lease, the court will proceed as though the Vine Street Lease was in force and effect at all relevant times. Neither HCA nor the Debtor has provided any evidence that the Vine Street Lease was ever renewed or updated. The Vine Street Lease relates to property located at 1935 East Vine Street, Salt Lake City, Utah (the "Vine Street Premises"). The parties agree that rent accrued under the Vine Street Lease during the post-petition period in the amount of $13,782.94 per month.
The Debtor took possession of the Vine Street Premises on September 23, 1998. The Debtor included the Vine Street Lease among those that were rejected by order entered March 8, 2000, which specifies that rejection "shall be effective as of the date the Property was or is scheduled to be closed." The attachment to the order indicates that the Vine Street Premises were scheduled to be closed on January 15, 2000. In fact, however, the Debtor did not vacate the Vine Street Premises until June 15, 2000.
The Debtor asserts that it made one post-petition, pre-rejection payment to the Vine Street Landlord in the amount of $13,782.94 on January 13, 2000. See Exhibit A to Debtor's Response to HCA's First Set of Interrogatories. The Debtor asserts that the amount of rent due under the Vine Street Lease for the post-petition period is $158,503.81. This number results from multiplying $13,782.94 (the monthly lease payment amount) by 11.5 (the prorated number of months of occupancy by the debtor in possession). It is not clear how the Debtor arrived at 11.5 months of occupancy, since presumably the period of occupancy at issue was from August of 1999 through June 15, 2000, a period of 10.5 months. This inconsistency is further confused by the fact that HCA alleges an 11 month occupancy, shorter than that alleged by the Debtor. Debtor claims that it made one payment in the amount of $13,782.94, resulting in an amount due of $144,720.87 per the Debtor.
HCA asserts that the Debtor owes it $92,185.60, the amount it paid the Vine Street Landlord. According to HCA, the total due post-petition to the Vine Street Landlord was $139,682.44 (inexplicably, this number is not derived by multiplying the monthly rental payment by 11 months; the court does not know how HCA arrived at this figure); HCA apparently gives the Debtor credit for some payment during the post-petition period, since HCA goes on to allege that the Debtor only owes $125,899.90 for post-petition occupancy.
Infusamed — Wright Brothers Drive Lease
The original lease for Infusamed is dated May 18, 1994 (the "Wright Brothers Drive Lease"). The parties are Green/Praver, et al. (the "Wright Brothers Drive Landlord"); and HealthTrust, Inc., predecessor in interest to HTI of Utah, Inc., as tenant (the "Prior HCA Wright Brothers Drive Tenant"). The Wright Brothers Drive Lease relates to property located at 150 Wright Brothers Drive, Suite 540, Salt Lake City, Utah (the "Wright Brothers Drive Premises"). By Amendment, the Wright Brothers Drive Lease was extended and expiration of the Lease was to be on June 30, 2001. The parties agree that rent accrued under the Wright Brothers Drive Lease during the postpetition period in the amount of $3,138.96 per month. In connection with this and related motions, the court directed the parties to prepare a chart setting forth their various factual contentions and claims (the "Location Payment History Chart"). HCA, in its Memorandum of Law and in the Location Payment History Chart, claims an additional $784.74 per month was due under the Wright Brothers Drive Lease for common area expenses. This amount was not included in HCA's original administrative expense claim relating to the Wright Brothers Drive Premises.
The Debtor took possession of the Wright Brothers Drive Premises on September 23, 1998. The Debtor included the Wright Brothers Drive Lease among those that were rejected by order entered March 8, 2000. The attachment to the order indicated that the Wright Brothers Drive Premises were scheduled to be vacated on January 15, 2000.
The Debtor asserts that it made six post-petition, pre-rejection payments to the Wright Brothers Drive Landlord in the total amount of $26,976.06, but that the amount of rent owed under the Wright Brothers Drive Lease was only $17,264.28. This number results from multiplying $3,138.96 (the amount of monthly lease payments) by 5.5 (the number of months of occupancy by the debtor in possession). The Debtor asserts that it is owed a credit of $3,433.86 for its overpayment of rent.
HCA asserts that it is owed $37,736.28, the amount it paid the Wright Brothers Drive Landlord. Even including the disputed common area expense, which would make the rental payments $3,923.70 per month, the post-petition, pre-rejection rent HCA claims was due is $23,542.20 (6 months multiplied by $3,923.70). HCA, then, admits that the Debtor overpaid rent by at least $5,395.71 if the effective date of rejection is the measure of the Debtor's obligation. HCA has failed to explain why it paid more to the Wright Brothers Drive Landlord than the amount of rent accrued under the Wright Brothers Drive Lease.
Pursuant to the APA, closing was to occur on or after September 30, 1998, and, with respect to leases, was to be accompanied by an assignment executed by HCA. The APA is silent as to the assumption of the leasehold obligations of HCA by the buyer. With respect to the Utah Home Health Agencies, the buyer was anticipated to be the Debtor.
On July 29, 1999, the Debtor and 102 affiliated companies filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in Memphis, Tennessee. On August 20, 1999, another 25 affiliated agencies filed voluntary petitions as well. On August 30, 1999, an order was entered providing for the joint administration of all the cases. On June 26, 2003, an order was entered approving the sale of substantially all the assets of the Medshares debtors to TBJG, LLC. Pursuant to the terms of sale, all administrative claimants share pro rata in a fund of $1,250,000.00. The court is now in the process of liquidating the remaining administrative expense claims so that payments can be made pursuant to the terms of sale.
The proof of claim filed by HCA in this case indicates that Medshares gave notice prior to closing that it would be unable to pay the cash portion of the purchase price called for in the APA. It obtained HCA's consent to a 14-day deferral for the payment, but never made the payment. Further, Medshares defaulted on payment due HCA under a note given for the balance of the purchase price. HCA has allocated to the Debtor a portion of the amounts due by Medshares for each of these obligations. In addition, HCA claims that pursuant to the APA, Medshares and the Debtor assumed certain obligations which were not performed by the Debtor. HCA claims that its pre-petition claim against the Debtor as the result of failure to perform assumed obligations with respect to the Utah Home Health Agencies is not yet determined. This obligation is identified in Exhibit A to HCA's proof of claim as "Lease on Real Property." HCA claims that it is owed an undetermined amount from the Debtor pursuant to a Collection Agreement entered into with Medshares and related debtors including the Debtor in this case. With respect to the home health care agency known as Columbia Homecare Utah, the landlord filed a proof of claim in a related bankruptcy case for an unsecured priority claim in the amount of $92,185.60. HCA has provided proof that it paid this claim in full by wire transfer on May 15, 2000.
In addition to its pre-petition claim, HCA has filed a motion for allowance of post-petition administrative expenses. HCA claims that it is owed $92,185.60 with respect to the Vine Street Premises and $37,736.28 with respect to the Wright Brothers Drive Premises, as the result of the Debtor's failure to pay post-petition rent. The motion claims that the prior tenants, HCA-affiliated entities (together, "the Prior HCA Tenants"), paid rent on the Debtor's behalf and thus provided a benefit to the bankruptcy estate. Further, HCA claims that by paying the rent owed, it is subrogated to the rights of the landlords, including the right to pursue an administrative expense claim.
ANALYSIS A. Standards for Considering Motions for Summary Judgment
Federal Rule of Civil Procedure 56(c), as incorporated by Federal Rule of Bankruptcy Procedure 7056, governs motions for summary judgment in adversary proceedings in bankruptcy. Summary judgment is proper if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). When a court reviews a motion for summary judgment, "the evidence, all facts, and any inferences that may be drawn from the facts must be viewed in the light most favorable to the nonmoving party." In re Morris, 260 F.3d 654, 665 (6th Cir. 2001) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)). The non-moving party must present enough evidence to show that there is a genuine issue of material fact in order to prevail. Klepper v. First Am. Bank, 916 F.2d 337, 342 (6th Cir. 1990). "A mere scintilla of evidence is insufficient; `there must be evidence on which the jury could reasonably find for the [non-movant].'" In re Morris, 260 F.3d 654, 665 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986)). Summary judgment should be entered "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Where both parties file motions for summary judgment, the standard for determining whether summary judgment is appropriate is not altered. "`[T]he court must evaluate each party's motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration.'" Lansing Dairy, Inc. v. Espy, 39 F.3d 1339, 1347 (6th Cir. 1994) (quoting Taft Broadcasting Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991)).
B. The Interplay of Sections 365(d)(3) and 503(b)(1)
Upon the filing of the bankruptcy case, the Debtor became a debtor in possession, and was empowered to either assume or reject any executory contract or unexpired lease. See 11 U.S.C. §§ 365(a) and 1107(a). Even if the pre-petition Debtor had assumed the Vine Street and Wright Brothers Drive Leases (together, the "Leases"), the post-petition debtor in possession retained the right to reject the Leases. The debtor in possession did elect to reject the Leases, and its election, effective December 15, 1999, was approved by the court by order entered March 8, 2000. Pursuant to 11 U.S.C. § 365(g), the rejection of an unexpired lease by a debtor constitutes a breach of the lease immediately before the filing of the petition. Damages flowing from the rejection of a lease become a pre-petition claim against the bankruptcy estate. See 11 U.S.C. § 502(g). Pursuant to Federal Rule of Bankruptcy Procedure 3002, a claim arising from the rejection of an unexpired lease may be filed within such time as the court directs. HCA filed its proof of claim on March 30, 2000, which includes a claim for an undetermined amount arising out of the Leases. No objection has been raised with respect to the timeliness of this claim.
A debtor in possession is obligated to timely perform the obligations of the debtor under any unexpired lease of nonresidential real property during the administration of a Chapter 11 case until the lease is assumed or rejected. See 11 U.S.C. § 365(d)(3). In this case, the debtor in possession paid more than the rent that accrued after the filing of the case. Specifically, it paid $26,976.06, and it asserts that a credit balance of $3,433.86 remains.
Section 503(b)(1)(A) provides for allowance of claims representing the "actual, necessary costs and expenses of preserving the estate." The Debtor argues that, notwithstanding the plain language of § 365(d)(3), HCA must show a benefit to the estate before its claim for post-petition rent will be entitled to administrative priority.
The timely-performance requirement was added to section 365 in 1984. The Bankruptcy Code specifies no remedy for failure to timely perform. See Cannery Row Co. v. Leisure Corp. (In re Leisure Corp.), 234 B.R. 916, 923 (B.A.P. 9th Cir. 1999). Nevertheless, the Court of Appeals for the Sixth Circuit has held that a debtor in possession or trustee is obligated to pay all obligations that come due under an unexpired lease prior to the assumption or rejection of the lease. See Koenig Sporting Goods, Inc. v. Morse Road Co. (In re Koenig Sporting Goods, Inc.), 203 F.3d 986, 989 (6th Cir. 2000). Further, the Sixth Circuit indicates in a footnote that the debtor's obligation should be determined without regard to the principles governing administrative claims under § 503(b)(1); a landlord need not demonstrate a benefit to the estate in order to be entitled to be paid post-petition, pre-rejection rent. Id. at n. 2.
The specific question answered by the court in Koenig was whether a debtor would be obligated to pay the full month's rent that came due prior to rejection, or only a pro rata share representing the period of the debtor's occupancy. The debtor in Koenig rejected a lease effective the second day of the month. Under the terms of its lease, monthly rent was due in advance on the first day of the month. The debtor argued that it was obligated to pay a pro rata share of the rent representing its two days' occupancy. The court rejected this argument and held that the debtor was obligated to pay the full month's rent. Koenig, 203 F.2d at 989.
The Debtor argues that Koenig does not apply in its case because it never assumed the Leases. The court is not persuaded that the failure of the Debtor to assume the Leases means that the Debtor had no obligation to pay rent for its occupancy of the premises. The Debtor apparently agrees because it paid rent in the post-petition period. See discussion of the obligations of an assignee of a real property lease under Utah law infra at Section D.
The court is persuaded that Koenig does apply to the present case, and that the Debtor is obligated to pay post-petition rent for the period of its occupancy. The requirements of section 503(b)(1) are not applicable here, meaning that in order to be entitled to post-petition, pre-rejection rent, a landlord need not show a benefit to the estate. The court must determine the amount of the obligation of the Debtor during that period. If the pre-petition Debtor had assumed the Leases, then clearly the terms of the Leases would control. The court now turns to a consideration of whether the Debtor did, in fact, assume the obligations under the Leases pursuant to the APA or related documents and, if not, the appropriate measure of its obligation to the respective landlords for its occupation of the premises.
C. Did the Debtor Assume the Obligations of HCA under the Prior Leases?
In its memorandum, HCA asserts that the Debtor "unmistakably assumed" HCA's obligations under the Leases. In its motion, HCA's statement is more guarded, stating that pursuant to the APA, the Debtor "agreed to assume" the obligations related to the operation of the home health agencies, including the Leases, and that upon closing of the sale, the Debtor took possession of the leased premises. As evidence of the assumption by the Debtor of the obligations due under the Leases, HCA points to the APA and an Assignment of Contracts and Assumption of Liabilities, dated October 16, 1998, by and between the Prior HCA Tenants and the Debtor (the "Assignment and Assumption Agreement"). Pursuant to the Assignment and Assumption Agreement, the Debtor expressly assumed those obligations described in section 2.3 of the APA that arose subsequent to the date of the agreement. Section 2.3 of the APA provides:
2.3 Assumed Liabilities. As of the Closing Date, Buyer shall agree to pay, perform and discharge the Assumed Liabilities. As used in this Agreement, the term "Assumed Liabilities" shall mean the following liabilities of the Owners: (i) the obligations of the Owners arising on or subsequent to the Closing Date under the Contracts; (ii) obligations of the Owners as of the Closing Date in respect of sick leave, extended illness bank, accrued vacation and accrued paid time off (collectively "PTO") of the Owners' or their affiliates' employees who are employed by the Buyer or its affiliates as of the Closing Date; and (iii) the accounts payable of the Owners related to the Agencies, but only to the extent (a) such accrued vacation and accrued paid time off and (b) such accounts payable are included in the determination of the Final Net Working Capital Statement.
If the Debtor assumed the Prior HCA Tenants' obligations under Leases, it must be because the Leases are contracts, because they are neither a PTO obligation nor an account payable. "Contracts" is a defined term under the APA. It includes, without limitation, all commitments, contracts, leases, and agreements described on Schedule 4.7 to the APA. See APA ¶ 1.1(h). Schedule 4.7 does not make reference to the Leases, nor to any other real property lease. Real property leases are listed in Schedule 4.8, which is described in the APA as the schedule of leasehold property to be assigned to the buyer at closing. See APA ¶ 1.1(a). With respect to the assignment of contracts, the Assignment and Assumption Agreements provide:
1. Assignment of Contracts. Subject to all the terms of the Agreement, Assignor hereby assigns, transfers, conveys and delivers to Assignee and Assignee hereby assumes all right, title and interest of Assignor in and to the Contracts (as defined in the [APA]). Assignee shall not assume or become liable or otherwise obligated for any contracts, obligations, or agreements of Assignor whatsoever except for such Contracts. The assignment of contracts herein also constitutes a delegation of the duties of Assignor under such Contracts, and, except as provided in the [APA], Assignee agrees to assume the performance of the obligations of Assignor under such contracts that arise subsequent to the date hereof.
As we have seen, "Contracts" for purposes of the APA does not expressly include real property leases. Further, pursuant to this paragraph, the Debtor "agrees to assume," but does not in fact assume, the obligations under the contracts.
In addition to the Assignment and Assumption Agreements, Bills of Sale were executed at closing pursuant to the APA. Pursuant to the Bills of Sale, HCA assigned its interest in all assets defined in the APA to the Debtor. Among the assets assigned to the Debtor pursuant to the Bills of Sale were the Leases, but the Bills of Sale are silent with respect to the assumption of liabilities related to the Leases. HCA has pointed to no agreement by which the Debtor expressly assumed obligations under the Leases. Since there was no assumption of the Leases, any post-petition obligation of the Debtor arises under Utah law pertaining to obligations of an assignee who takes possession of leased premises under an assignment.
D. What are the Obligations of the Debtor to the Landlord under Utah Law?
The Debtor as occupying assignee has an obligation to pay rent measured by the terms of the Leases which were assigned. The common law of the state governs these obligations. In Utah, as in many states which have adopted traditional common law jurisprudence, the remedies for the assignor of a nonresidential lease when the assignee fails to perform under the assignment depends upon the assignee's actions post-assignment. If the assignee does not expressly assume the lease but does take possession of the premises under an assignment, the assignee is not bound by the contractual terms of the lease but is in privity of estate with the original lessor, and takes the estate of the lessee (assignor) subject to the covenants that run with the land during the period of the assignee's occupancy. See generally 49 Am. Jur. 2d, Landlord and Tenant §§ 1112, 1132 (2004). The common law distinctions described in American Jurisprudence, specifically the privity of contract/privity of estate distinction, have been adopted by the Supreme Court of Utah. See, e.g., Flying Diamond Oil Corp. v. Newton Sheep Co., 776 P.2d 618, nn. 5,6,13 (Utah 1989). The obligation to pay rent is one of the covenants running with the land. See 49 Am. Jur. 2d, Landlord and Tenant § 1112 (2004) ("the assignee of a lease takes the whole estate of the lessee subject to performance on his part of the covenants running with the land. . . . [I]f through the assignee's neglect . . . to perform them the lessee is obliged to pay rent, . . . the assignor may recover from the assignee the sums so paid. . . ."); see, e.g., Ellingson v. Walsh, O'Connor Barneson, 15 Cal. 2d 673, 675-76 (Cal. 1940) ("[t]he lease has a dual character; it is a conveyance of an estate for years, and a contract between lessor and lessee. The result is that dual obligations arise, contractual obligations from the terms of the lease [privity of contract], and obligations under the law from the creation of the tenancy [privity of estate]."). Where an assignment is made by the tenant to a third party who does not assume the obligations of the tenant arising because of privity of contract, the entry and occupation of the third party is still considered to be under the lease. The third party successor to the original lessee is bound by the covenant to pay rent in the lease, which arises from privity of estate and which runs with the land. Id. Upon taking possession of the leased premises in question, the Debtor entered into privity of estate with the landlords and became obligated to pay rent measured by the Leases.
If either lease expired during the post-petition, pre-rejection period, the Debtor became a tenant at sufferance or at will, depending on whether the Debtor stayed with or without permission. Either way, at common law the Debtor is liable as a holdover tenant for using and occupying the leased property during the holdover period at the same rate at which he previously rented the premises. See, e.g., Eikelberger v. Tolotti, 94 Nev. 58, 62 (Nevada 1978) (citing the Restatement (Second) of Property (Landlord and Tenant)); see also 1 Tiffany, Real Property §§ 174, 179 (3d ed. 1997).
For the administrative period, even though the Debtor did not assume the Leases, it nevertheless is obligated to pay rent measured by the terms of the Leases. The court next considers whether the date of entry of the order approving the Debtor's rejection of the Leases or the effective date of rejection specified in that order should be used in determining the Debtor's post-petition, pre-rejection obligation to the Landlords.
E. Does Date of Entry of Order or Effective Date of Rejection Determine Debtor's Obligation?
The order approving the Debtor's rejection of the Lease was entered March 8, 2000. The order specifically provides that rejection "shall be effective as of the date the Property was or is scheduled to be closed." Neither the Vine Street Landlord, the Wright Brothers Drive Landlord (together, the "Landlords"), nor HCA objected to the entry of this order. HCA argues that "the enforcement of a retroactive rejection order in this case would eviscerate the statutory protection provided to non-residential real property lessors and would inflict harm upon HCA." Location Payment History Chart, n. 3. In support of its policy-based argument, HCA cites several cases, including Thinking Machines, for the proposition that "a rejection is effective only upon court approval of the decision to reject the lease." Id. (citing In re Revco Drug Stores, Inc., 109 B.R. 264, 269 (Bankr. N.D. Ohio 1989) (holding that the rejection process was designed to "provide a degree of factual certainty in determining the actual date of rejection"); and In re Federated Department Stores, Inc., 131 B.R. 808, 815-16 (S.D. Ohio 1991) (holding that setting the "effective date of rejection earlier than the order approving would put the Lessor in an unfairly awkward position")). HCA failed to point out that in Thinking Machines, the First Circuit noted that, "we think it behooves us to make clear that nothing in our holding today precludes a bankruptcy court, in an appropriate section 365(a) case, from approving a trustee's rejection of a nonresidential lease retroactive to the motion filing date." In re Thinking Machines Corp., 67 F.3d 1021, 1028 (1st Cir. 1995) After further analysis, the First Circuit found the entry of a retroactive order to be appropriate so long as it does not penalize a creditor and so long as it promotes the purposes of § 365(d)(3). See id. (citing In re Jamesway Corp., 179 B.R. 33, 37 (Bankr. S.D.N.Y. 1995)); see also In re CCI Wireless, LLC, 297 B.R. 133, 140 (D. Colo. 2003) ("the bankruptcy court has authority under section 365(d)(3) to set the effective date of rejection at least as early as the filing date of the motion to reject"). The appropriate time for HCA to raise an objection to an order's retroactively effective date would have been immediately following the entry of the order; had such an objection been raised, the court would have considered the equities of the case for the Landlords and the Debtor. Absent timely objection, HCA is bound by the terms of the rejection order, including the provision of an effective date of rejection that predated the entry of the order. In the case of the Wright Brothers Drive Lease, the effective date of rejection was the date the Debtor vacated the premises, January 15, 2000, though the order approving its rejection was entered March 8, 2000. In the case of the Vine Street Lease, however, the Debtor actually vacated the premises on June 15, 2000, and this is the effective date of rejection. The court next turns to the question of whether the Debtor is entitled to prorate rent for the month in which it vacated the property.
F. Is the Debtor Entitled to Prorate Rent for Less than a Full Month's Occupancy?
The Debtor vacated the Vine Street Premises on June 15, 2000. It actually occupied the premises for ten and one-half months after the filing of its bankruptcy petition. The court must determine whether the Debtor is entitled to prorate rent for the month of June 2000.
The Debtor vacated the premises on Wright Brothers Drive on January 15, 2000. It actually occupied the premises for five and one-half months after the filing of its bankruptcy petition. The Debtor argues that it is entitled to prorate the rent for the month of January 2000.
Koenig holds that a debtor must pay a full month's rent in accordance with the terms of a lease that provides for payment of rent monthly in advance. We have seen that even though the Debtor did not assume the Vine Street Lease or the Wright Brothers Drive Lease, the Debtor's obligation to pay rent is measured by the terms of the lease in question. Rent for the period of time from the expiration of the lease until Debtor vacated the premises should not be prorated based upon the monthly rent paid during the lease. The Debtor is obligated to pay the Vine Street Landlord eleven months' rent for its post-petition use and occupancy of the Vine Street Premises and is obligated to pay the Wright Brothers Drive Landlord six months' rent for its post-petition use and occupancy of the Wright Brothers Drive Premises.
Having found that at least in some respects the Debtor has liability for obligations due under the Leases, the court now turns to decide whether HCA, as subrogee, is entitled to be paid for any portion of the Debtor's tenancy.
G. Is HCA Entitled to Be Subrogated to the Rights of the Landlords?
HCA claims that it is entitled to be subrogated to the rights of the Landlords vis-á-vis the Debtor to the full extent of payments made by it to the Landlords. HCA paid $92,185.60 to the Vine Street Landlord and $37,736.28 to the Wright Brothers Drive Landlord during the period between the filing of the petition and the rejection of the Leases by the Debtor. See Affidavit of Thomas F. Ramsey, dated November 7, 2002. Section 509 of the Bankruptcy Code provides:
(a) Except as provided in subsection (b) or (c) of this section, an entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment.
* * *
(c) The court shall subordinate to the claim of a creditor and for the benefit of such creditor an allowed claim, by way of subrogation under this section, or for reimbursement or contribution, of an entity that is liable with the debtor on, or that has secured, such creditor's claim, until such creditor's claim is paid in full, either through payments under this title or otherwise.
11 U.S.C. § 509 (emphasis added). Clearly, full payment of the debt is required by § 509 before a subrogee can receive any reimbursement for payments made, since subrogee's claim must be subordinated until the creditor is fully paid. See In re Southwest Equipment Rental, Inc., 193 B.R. 276, 283-84 (E.D. Tenn. 1996) ("subrogation requires payment of the full debt"); McGrath v. Carnegie Trust Co., 116 N.E. 787, 788 (N.Y. 1917) ("the equity of subrogation does not arise until the whole debt has been discharged").
HCA also asserts a right to subrogation outside of the Bankruptcy Code under principles of equitable subrogation. The question of whether § 509 and equitable subrogation are complementary, identical, or mutually exclusive has divided the courts that have considered the question. See Pandora Industries, Inc. v. Paramount Communications, Inc. ( In re Wingspread), 145 B.R. 784, 787 (S.D.N.Y 1992) (describing the split of authority on the issue, identifying pertinent bankruptcy cases on point). The court in Southwest Equipment Rentals held that "equitable subrogation is separate and distinct from subrogation rights afforded by § 509." In re Southwest Equipment Rental, Inc., 193 B.R. at 283. The Southwest Equipment Rentals court went on to outline the requirements for equitable subrogation:
(1) payment must have been made by subrogee to protect own interest;
(2) subrogee must not have acted as a volunteer;
(3) debt paid must be one for which subrogee was not primarily liable;
(4) entire debt must have been paid;
(5) subrogation must not work any injustice to rights of others.
Id. (citing In re Flick, 75 B.R. 204 (Bankr. S.D. Cal. 1987)). The Southwest Equipment Rentals court pointed out that both equitable subrogation and subrogation under § 509 require payment of the full claim by the subrogee. In re Southwest Equipment Rental, Inc., 193 B.R. at 283-84.
Undoubtedly, HCA is entitled to be subrogated to the rights of the Landlords to the extent that it discharged the Debtor's obligations to the Landlords for post-petition rent. See 11 U.S.C. § 509(a). HCA was liable with the Debtor to the Landlords for the value of the Debtor's use of the property.
The Debtor also made certain post-petition rent payments, however. The Debtor need not reimburse HCA for rent payments the Debtor paid to the Landlords on its own behalf. At most, if indeed HCA fully discharged the obligations due the Landlords under the Leases, it is entitled to be paid the difference between the amount owed by the Debtor and the amount paid by the Debtor.
With respect to the Vine Street Lease, the Debtor owed $151,612.34 ($13,782.94 x 11 months). The Debtor paid $13,782.94 and HCA paid $92,185.60, leaving a balance owed to the Vine Street Landlord of $45,643.80. Until HCA pays the full obligation owed to the Vine Street Landlord, it is not entitled to be subrogated to the rights of the Vine Street Landlord.
With respect to the Wright Brothers Drive Lease, the Debtor owed $23,542.20. The Debtor paid $26,976.06. It is entitled to a credit of $3,433.86 from the Wright Brothers Drive Landlord, and HCA is not entitled to be reimbursed by the Debtor for payments HCA made to the Wright Brothers Drive Landlord.
CONCLUSION
For the foregoing reasons, the Debtor's motion for summary judgment is GRANTED in part and DENIED in part; and HCA's motion for summary judgment is GRANTED in part and DENIED in part. HCA is allowed a claim for post-petition rent in the amount of $92,185.60, but is subordinated to the claim of the Vine Street Landlord. HCA's claim with respect to the Wright Brothers Drive Lease is disallowed in its entirety.