Opinion
Case No. 02-06360-JKC-11
June 5, 2002
ORDER GRANTING MOTION TO COMPEL DEBTOR TO IMMEDIATELY PAY POST-PETITION STUB RENT AND OVERRULING DEBTOR'S OBJECTION THERETO
This matter comes before the Court on the Motion to Compel Debtor to Immediately Pay Post-Petition Stub Rent filed by Robert W. Reed, Mary Jane Reed, The Heritage House, Inc., Robert W. Reed Revocable Trust, Pamela J. Deprez, Richard J. Reed, Carly L. Reed, Bobbi L. Connor, Clinton House, Inc., Heritage House of Richmond, and Heritage House of New Castle (collectively, the "Landlords"), and on the Objection thereto filed by Debtor Trinat Health Care, Inc. ("Trinat"). Following a hearing on May 2, 2002, the Court took the matter under advisement and asked the parties to file briefs on their respective positions. Those briefs having been filed and reviewed, the Court now issues the following Order, wherein it finds that the rent due the Landlords for the period of April 15 through April 30 is entitled to immediate payment pursuant to 11 U.S.C. § 365(d)(3).
Trinat filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the "Code"), on April 15, 2002 (the "Petition Date), and continues to operate as a debtor-in-possession pursuant to 11 U.S.C. § 1107 and 1108. Trinat operates nine long-term care nursing homes throughout Indiana (the "Facilities"). The Landlords own each of the Facilities, which they lease to Trinat pursuant to nine separate leases (the "Leases"). According to the Leases, Trinat is obligated to pay rent for the Facilities on the first day of the month. As of April 1, 2002, Trinat failed to make the lease payments for the Facilities, and such amounts remain unpaid.
Throughout this Order, the Court refers to the petition date synonymously with the date the order for relief was entered. Admittedly, they do not necessarily fall on the same date. If that is the case, the date the order for relief is entered is dispositive for purposes of § 365(d)(3).
On April 25, 2002, the Landlords filed their Motion to Compel Debtor to Immediately Pay Post-Petition Stub Rent, wherein they argued that the rent for the period of April 15 to April 30, 2002, is entitled to immediate payment as an administrative expense pursuant to 11 U.S.C. § 365(d)(3). The Debtor objected, arguing that the rent for April became due before the Petition Date and, therefore, should be treated as a pre-petition claim in its entirety and is not entitled to immediate payment pursuant to § 365(d)(3). Upon reviewing the parties' respective briefs and other pertinent authorities, the Court agrees with the position advocated by the Landlords.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
Code § 365(d)(3) governs the obligations of a debtor/tenant to its landlord between the entry of the order for relief in bankruptcy and the time the debtor assumes or rejects the lease. The statute provides in relevant part:
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.
Before the enactment of § 365(d)(3), the payment of post-petition lease obligations prior to assumption or rejection was governed by Code § 503(b)(1). That section provides for the allowance of administrative expenses, including the "actual, necessary costs and expenses" of preserving the of the "actual, necessary costs and expenses of preserving the estate" Pursuant to this section, various courts allowed, as an administrative expense, the full amount of the rent at the contract rate, so long as it was not clearly unreasonable, but the rent was prorated between the pre-petition and the post-petition, pre-rejection periods. See, e.g., In re Dunwoody Village Sporting Goods, Inc., 11 B.R. 493, 494 (Bankr.N.D.Ga. 1981); In re Keyboard Ctr., Inc., 9 B.R. 472, 474 (Bankr.D.Conn. 1981). Similarly, other relevant decisions allowed a prorated payment of real estate taxes over the post-petition, pre-rejection period. See, e.g., Field v. Herrell (In re J. Bain, Inc.), 554 F.2d 255 (5th Cir. 1977); In re Lackow Brothers, Inc., 18 B.R. 770, 772 (Bankr.S.D.Fla. 1982).
Following the enactment of § 365(d)(3) in 1984, the trustee or debtor-in-possession was required to adhere strictly to the terms of any given lease for nonresidential real property, and thereby removed the bankruptcy court's discretion to alter the amount of the rent due under the lease during the post-petition period. Furthermore, under § 365(d)(3), the trustee or debtor-in-possession was clearly required to "timely perform" its obligations, as defined by the terms of the unexpired lease. Thus, during the post-petition, pre-rejection period, § 365(d)(3) helped insure that rent and other obligations under a lease would be timely paid. As explained by the Seventh Circuit in In re Handy Andy Home Improvement Ctrs., Inc., 144 F.3d 1125, 1128 (7th Cir. 1998), § 365(d)(3) was designed to protect landlords from the unique harms suffered by them during a bankruptcy case:
Until its enactment in 1984, the landlord was in an awkward spot during the interval between the entry of the tenant into bankruptcy and the tenant's decision to assume or reject the unexpired lease. At the same time that the automatic stay would prevent the landlord from evicting the tenant . . ., the "actual, necessary" provision of section 503(b)(1), at least as interpreted by many courts . . ., might prevent the landlord from collecting the rent in full, promptly, and without legal expense. This was a problem for all post-petition creditors-section 503(b)(1) is not limited to landlords-but most of the others were dealing voluntarily with a bankrupt and thus knowingly assuming the risk of not being fully compensated for their services, while the landlord was being forced to deal with his bankrupt tenant on whatever terms the bankruptcy court imposed because he could not evict him. To give relief to landlords, Congress passed section 365(d)(3), which takes them out from under the "actual, necessary" provision of 503(b)(1) and allows them during that awkward postpetition prerejection period to collect the rent fixed in the lease. There is no indication that Congress meant to go any further than to provide a landlord an exception to 503(b)(1), and thus no indication that it meant to give landlords favored treatment for any class of prepetition debts.
While Congress clearly intended to provide landlords of nonresidential real property timely payment at the contract rate for services provided under the lease during the post-petition, pre-rejection period, Congress did not specifically state how the obligations owed under a lease should be allocated. Arguably, since neither the legislative history nor the statute itself explicitly address this issue, one could assume that § 365(d)(3) was not intended to change the long-standing practice of prorating the rent between the pre-and post-petition periods. Many courts considering this question have adhered to this practice, dividing the rental obligation up between the pre-and post-petition periods, regardless of the "billing date" set forth in the lease. See In re McCrory Corp., 210 B.R. 934 (S.D.N.Y. 1997); In re William Schneider, Inc., 175 B.R. 769 (S.D.Fla. 1994); In re Travel 2000, Inc., 264 B.R. 444 (Bankr.W.D.Mich. 2001); In re Best Products Co., 206 B.R. 404 (Bankr. E.D.Va. 1997); In re All for A Dollar, Inc., 174 B.R. 358 (Bankr.D.Mass. 1994); In re Almac's, Inc., 167 B.R. 4 (Bankr.D.R.I. 1994); In re Revco D.S., Inc., 111 B.R. 626 (Bankr.N.D.Ohio 1989). However, other courts have held that a debtor is not obligated under that § 365(d)(3) to pay rent or obligations that first became due under the subject lease pre-petition. See, e.g., In re Duckwall-ALCO Stores, Inc., 150 B.R. 965 (D.Kan. 1993); In re Krystal Co., 194 B.R. 161 (Bankr.E.D.Tenn. 1996); In re F M Distributors, Inc., 197 B.R. 829 (Bankr.E.D.Mich. 1995); In re Appletree Markets, Inc., 139 B.R. 417 (Bankr.S.D.Tex. 1992). This is commonly known at the "billing date" approach.
After reviewing all of the conflicting cases on this issue, the Court must admit that it could plausibly find support for the respective positions taken by the Debtor and the Landlords in this case. In the end, the Court is persuaded by those cases which conclude that the proration approach is more equitable, leads to a more logical result and is in keeping with the purpose behind not only § 365(d)(3) but with the entire Code. In this Court's opinion, prorating the rent between the pre-and post-petition periods for purposes of § 365(d)(3) acknowledges that a landlord is providing a crucial benefit to the Debtor and estate and should be paid accordingly. A landlord would otherwise be put in the same position at the beginning of a case that existed prior to the 1984 amendments to the Code, i.e., being forced to provide services to the debtor without compensation or recourse.
Furthermore, the Court finds that the proration approach under the present facts is consistent with the Seventh Circuit's decision in Handy Andy. In that case, the court was asked to determine whether certain property taxes that accrued pre-petition but were billed to the debtor during the post-petition, pre-rejection period were subject to payment pursuant to § 365(d)(3). In ruling against the landlord in that case, the court stated the following:
Statutory language like other language should be read in context. The context consists not merely of other sentences but also of the real-world situation to which the language pertains. . . .When context is disregarded, silliness results. The rule for which [the landlord] contends would make the rights of creditors turn on the happenstance of the dating of tax bills and the strategic moves of landlords and tenants. Suppose Cook County billed for taxes in advance, as the Internal Revenue Service does, and suppose the tax bill that Cook County sent [the landlord] in September 1995 was for 1996 taxes. Under [the landlord's] interpretation of section 365(d)(3), the entire bill would become a prepetition debt if the order for relief . . . was entered [thereafter], since under that interpretation all bills payable before the date of the order are for prepetition debts even if the bill is for the prepayment of services that will be rendered . . . in the postpetition period. We don't see the sense in that.
Handy Andy, 144 F.3d at 1128 (italics added). The italicized portion above is particularly persuasive in stating, as it does, that the proper focus of the Court's § 365(d)(3) inquiry is on when the services in question are rendered to and benefit the estate, not the date when the debtor is first billed for them. Like the Seventh Circuit, this simply seems to be the more sensible approach, and the one that the Court chooses to follow here.
Based on the foregoing, the Court GRANTS the Landlords' Motion to Compel Debtor to Immediately Pay Postpetition Stub Rent.