Opinion
Case No. 03-17171.
December 19, 2005.
J. David Krekeler, Krekeler Strother, S.C., Madison, WI, for Debtor.
MEMORANDUM DECISION
C.Q., LLC filed Chapter 11 bankruptcy in this court on September 29, 2003. On, November 21, 2003, the debtor's motion to assume its long term lease with Madison East Shopping Center Partners (MESC) was granted.
On December 8, 2004, the debtor's case was converted to Chapter 7. After conversion, the debtor did not assume or reject the lease, nor were any payments made for the amount due under the lease as required by 11 U.S.C. § 365(d)(3). Sixty days after conversion, the lease automatically terminated pursuant to 11 U.S.C. § 365(d)(4). The Chapter 7 trustee and MESC then entered into an agreement allowing the trustee to store items in the formerly leased building.
On October 25, 2005, MESC filed a motion for payment of an administrative claim in the amount of $21,133.30: $4,226.66 due for two months post conversion rent under the assumed lease, and $16,906.64 due under the storage agreement. MESC seeks immediate payment of $4,226.66 under 11 U.S.C. § 365(d)(3), and payment of the remaining $16,906.64 an administrative expense under 11 U.S.C. § 503(b)(1). There is no dispute about the $16,906.64 storage claim. However, the trustee (and a creditor, but that makes no difference) objects to immediate payment in full of MESC's pre-rejection rent claim for $4,226.66.
The trustee argues that the disputed amount is entitled only to administrative expense priority, because there is no provision in the Bankruptcy Code granting "super-priority" status to claims under Section 365(d)(3). The trustee also states that the bankruptcy estate does not have funds sufficient to make a payment of $4,226.66 to MESC.
Does Section 365(d)(3) create a super-priority for pre-rejection lease obligations? Section 365 provides in relevant part:
§ 365. Executory contracts and unexpired leases (d)(3) The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title. The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period. This subsection shall not be deemed to affect the trustee's obligations under the provisions of subsection (b) or (f) of this section. Acceptance of any such performance does not constitute waiver or relinquishment of the lessor's rights under such lease or under this title.
Section 365 clearly requires timely performance of pre-rejection lease obligations, but does not establish any consequence for failing to make the required payments. The Seventh Circuit Court of Appeals has not ruled on whether unpaid rent due under the requirement of "timely performance" is entitled to a super-priority. Our analysis is further complicated by the fact that bankruptcy courts addressing this issue have reached divergent results, even within this circuit. Compare In re Joseph C. Spiess Co., 145 B.R. 597 (Bankr. N.D. Ill. 1992), with In re Telesphere Communications, Inc.,On December 8, 2004, the debtor's case was converted to Chapter 7. After conversion, the debtor did not assume or reject the lease, nor were any payments made for the amount due under the lease as required by 11 U.S.C. § 365(d)(3). Sixty days after conversion, the lease automatically terminated pursuant to 11 U.S.C. § 365(d)(4). The Chapter 7 trustee and MESC then entered into an agreement allowing the trustee to store items in the formerly leased building.
On October 25, 2005, MESC filed a motion for payment of an administrative claim in the amount of $21,133.30: $4,226.66 due for two months post conversion rent under the assumed lease, and $16,906.64 due under the storage agreement. MESC seeks immediate payment of $4,226.66 under 11 U.S.C. § 365(d)(3), and payment of the remaining $16,906.64 an administrative expense under 11 U.S.C. § 503(b)(1). There is no dispute about the $16,906.64 storage claim. However, the trustee (and a creditor, but that makes no difference) objects to immediate payment in full of MESC's pre-rejection rent claim for $4,226.66.
The trustee argues that the disputed amount is entitled only to administrative expense priority, because there is no provision in the Bankruptcy Code granting "super-priority" status to claims under Section 365(d)(3). The trustee also states that the bankruptcy estate does not have funds sufficient to make a payment of $4,226.66 to MESC.
Does Section 365(d)(3) create a super-priority for pre-rejection lease obligations? Section 365 provides in relevant part:
§ 365. Executory 148 B.R. 525 (Bankr. N.D. Ill. 1992).
With all due respect to the several courts that have found unpaid rent to be a mere administrative priority, it is certain to me that the language in Section 365(d)(3) requiring "timely performance" places payment of rent before the payment of administrative expenses. That is true even where the bankruptcy estate is administratively insolvent. Congress has spoken clearly.