Opinion
Case No. 02-06360-JKC-11
July 14, 2003
This matter comes before the Court on a Motion for (1) Allowance and Payment of Administrative Claims and for (2) Order Requiring Payment of Certain Lease Obligations Pursuant to § 365(d)(3) (the "Motion"). For the reasons stated below, the Court denies the Motion in part and grants the Motion in part.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and 157(b)(1). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).
I. Facts and Procedural History
On April 15, 2002 (the "Petition Date"), Trinat Health Care, Inc., d/b/a Heritage House of Clinton, Heritage House of Greensburg, Heritage House of Seymour, Heritage House of Salem, Heritage House of New Castle, Heritage Manor, Heritage House Convalescent Center of Shelbyville, Clinton House of Frankfort, and Regency Manor ("Trinat"), filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. As of the Petition Date, Trinat operated nine long-term care nursing homes (the "Facilities") located throughout Indiana pursuant to lease agreements (the "Lease") with Heritage Therapy LLC ("Heritage"), Robert W. Reed, Mary Jane Reed, The Heritage House, Inc., Robert W. Reed Revocable Trust, Pamela J. Deprez, Richard J. Reed, Garry L. Reed, Bobbi L. Connor, Heritage House of Clinton, Inc., Heritage House of Seymour, Inc., Heritage House of Salem, Inc., Heritage House of Connersville, Inc., and the Heritage House of New Castle (collectively, the "Landlords"). On June 30, 2002, Trinat rejected the Lease pursuant to 11 U.S.C. § 365 (the "Rejection Date").
According to its Motion, Heritage and the Landlords seek payment of various claims, under either 11 U.S.C. § 503(b)(1)(A) (the "Administrative Claims") or 11 U.S.C. § 365(d)(3) (the "Lease Claims"). In summary the Administrative Claims include:
(a) $124,706.45 sought by Heritage for physical therapy services provided at the Facilities operated by Trinat during the post-petition/pre-rejection period; and
(b) $771.31 sought by the Landlords for washing machine expenses incurred by Trinat during the post-petition/pre-rejection period.
The Landlords's Motion also includes a claim for certain utility costs paid by the Landlords on behalf of Trinat. The parties have agreed that this issue will be presented to and decided by the Court at a later date.
In summary, the Lease Claims include:
(a) $110,866.29 sought by the Landlords for real and personal property taxes which accrued in 2001 but became payable on May 10, 2002;
(b) $46,776.46 sought by the Landlords for real and personal property taxes that accrued from the Petition Date to the Rejection Date;
(c) $93,208.52 sought by the Landlords in "double rent" for Trinat's use of Heritage House of Richmond during May and June of 2002; and
(d) $335,108.00 sought by the Landlords for "additional rent" owed pursuant to Section 2.2(a) of the Lease for the year 2001.
Various objections to the Motions have been posed by Trinat, the Official Unsecured Creditors' Committee (the "Committee") and Hoosier Health Systems, Inc. ("Hoosier"). The Court conducted a hearing on February 18 and 19, 2003, at which time evidence was submitted, while certain other facts, as indicated below, were stipulated to by the parties. Following the hearing, the Court took the matter under advisement.
II. Discussion and Decision A. The Administrative Claims 1. Heritage's Physical Therapy Services Claim
Heritage seeks $124,706.45 as payment for certain physical therapy services (the "Therapy Claim") rendered for Trinat during the post-petition/pre-rejection period. The parties agree that these services were an actual and necessary cost of preserving the estate under 11 U.S.C. § 503(b)(1)(A); however, they disagree as to the proper amount of the claim. More specifically, Hoosier argues that the Therapy Claim should not be allowed until a determination is made as to which of the charges are refused or charged-back by Medicare.
Having reviewed the parties' briefs and the evidence submitted on this issue, the Court is not confident that either it or the parties fully understand this issue. For example, questions remain as to the mechanics of the Medicare audit process and parties' historic treatment of the adjustments that follow such audits; which provisions of the Lease Termination Agreement, if any, actually govern the Court's analysis of the Therapy Claim; and which party bears or should bear the risk of loss associated with a Medicare audit. In an effort to better understand this issue, the Court will conduct an additional hearing and will issue a separate scheduling notice in due course.
2. Washing Machine Lease Payment
During its operation of the Facilities during the post-petition/pre-rejection period, the Debtor incurred $771.31 in expenses related to its lease of a washing machine from Hoosier. Upon assuming operation of the Facilities, the Landlords paid this debt allegedly to prevent any disruption in services. As represented by the parties at the Court's hearing on February 18, 2003, the parties have agreed that $124.52 of the total amount claimed by the Landlords shall be treated as an administrative expense under Code § 503(b)(1)(A). Consistent with this agreement, the Court orders that this amount be paid as an administrative priority expense.
B. The Lease Claims 1. 2001 Property Taxes
The parties have stipulated that on May 10, 2002, the Landlords paid $110,866.29 for property taxes that accrued on the Facilities during 2001 (the "2001 Tax Claim") pursuant to § 10.5 of the Lease, which provides that "[i]f Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default of Tenant hereunder, make any such payment or perform any such act for the account and at the expense of Tenant. . . ." The Landlords claim that the 2001 Tax Claim should be paid immediately pursuant to § 365(d)(3) of the Code as an expense that arose under the Lease during the post-petition/pre-rejection period. Trinat, Hoosier and the Committee have objected, arguing that the 2001 Tax Claim arose pre-petition and should be treated as a general unsecured claim.
In deciding this issue, the Court looks first to the text of § 365(d)(3), which 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 that the trustee or as in this case, the debtor-in-possession, "shall timely perform all the obligations of the debtor . . . 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." Section 365(d)(3) has generated a great deal of controversy among the courts in their effort to interpret the phrase "arising from and after the order for relief." As explained more thoroughly below, the Seventh Circuit has adopted what is referred to as the "pro-ration" approach. In re Handy Andy Home Improvement Ctrs., 144 F.3d 1125 (7th Cir. 1998).
Section 503(b)(1) of the Code provides administrative expense priority to the "actual, necessary costs and expenses of preserving the estate."
In Handy Andy, the debtor leased commercial property in Cook County, Illinois from National Terminals Corporation ("National"). Under the parties' lease, the debtor was required to pay all real estate taxes for the property during the lease term and further provided that if the lease ended in the middle of a tax period, the taxes would be prorated between the parties so that Handy Andy was responsible only for those taxes that accrued prior to termination or expiration of the lease. Id. at 1126. The taxes were billed to National, as owner of the property. The lease further provided that National could either transmit the bill to Handy Andy, which would then be responsible for paying the taxes directly to Cook County, or pay the taxes itself and then seek reimbursement from the debtor. Property taxes in Cook County are billed, as they are here, in arrears. Id.
In September of 1995, National received the tax bill for the second half of 1994. The following month, an involuntary Chapter 11 petition was initiated against Handy Andy. Two weeks after the commencement of the case, National paid the September installment of the 1994 taxes and sent a bill to the debtor. Shortly thereafter, an order for relief was entered in the case. During the following February, National received the bill for the first installment of the taxes assessed in 1995. It again paid the taxes and then invoiced the debtor. Handy Andy rejected the parties' lease the following April. Id.
Pursuant to § 365(d)(3), National insisted that Handy Andy's obligation to reimburse it for the second installment of the 1994 taxes and the first installment of the 1995 taxes did not arise until the first rental due after National invoiced Handy Andy, and therefore that Handy Andy is obligated by section 365(d)(3) to pay the taxes. Id. at 1127. In rejecting that argument, the Seventh Circuit stated:
The quarrel between the parties is whether Handy Andy's "obligation" under the lease could arise before Handy Andy was contractually obligated to reimburse National for the taxes that the latter had paid. National says no, and this "billing date" approach is a possible reading of section 365(d)(3), but it is neither inevitable nor sensible. It is true that Handy Andy's obligation to National to pay (or reimburse National for paying) the real estate taxes did not crystallize until the rental due date after the taxes were paid. But since death and taxes are inevitable and Handy Andy's obligation under the lease to pay the taxes was clear, that obligation could realistically be said to have arisen piecemeal every day of 1994 and to have become fixed irrevocably when, the last day of the year having come and gone, the lease was still in force. Had the lease been terminated for one reason or another on January 1, 1995, Handy Andy would have had a definite obligation to reimburse National for the 1994 real estate taxes when those taxes were billed to National. The obligation thus arose, in perfectly good sense, before the bankruptcy. The obligation to reimburse National for the first installment of the 1995 taxes likewise arose before the bankruptcy.
Id. Central to the Seventh Circuit's holding that the taxes constituted a pre-petition debt is the fact that Handy Andy was obligated under its lease to pay those taxes which accrued during the lease term.
In an attempt to avoid a similar holding, the Landlords direct the Court to In re Consolidated Industries Corp., 234 B.R. 84 (Bankr.N.D.Ind. 1999). In that case, the subject lease provided in relevant part that the debtor/lessee "shall pay the real estate taxes due and payable during the term of the Lease." Id. at 86 (italics added). Emphasizing that "the obligation to pay real estate taxes is triggered, not by the day or days for which the taxes accrue, but instead, by the date they become `due and payable,'" the court held that the subject taxes were immediately payable under § 365(d)(3). In contrast, Trinat agreed under § 3.2 of the Lease "to pay and discharge . . . any and all taxes . . . and other assessments levied or assessed against the Premises . . . prior to delinquency or imposition of any fine, penalty, interest or other cost. . . ." (emphasis added). Significantly, § 3.3 of the Lease further provides that "[a]t the end of the Term, all Premises Taxes shall be prorated."
These lease terms are materially similar to those found in the Handy Andy lease. Most significantly, the parties are responsible under the Lease for taxes on a pro-rata basis. That is, Trinat is responsible only for taxes that are levied or assessed during its possession and use of the Facilities, regardless of when those taxes are billed. The Landlords, in turn, are responsible only for those taxes which are assessed after termination or expiration of the Lease. In this sense, as in Handy Andy, Trinat's tax obligations under the Lease can be said to arise "piecemeal" every day of the taxing period. Accordingly, the Court must conclude that Trinat's obligation to pay the 2001 taxes arose prior to the Petition Date and that the Landlords are thereby not entitled to payment of the taxes pursuant § 365(d)(3).
2. 2002 Property Taxes
Shifting their argument, the Landlords also seek the immediate payment of those real and personal property taxes which accrued from the Petition Date to the Rejection Date (the "2002 Tax Claim"), a request that Trinat concedes is appropriate. Based on the reasoning articulated above, the Court agrees that the 2002 Tax Claim is immediately payable under § 363(d)(3) in that it arose during the post-petition/pre-rejection period.
3. The Landlord's "Double Rent" Claim
The Landlords seek the immediate payment of $93,208.52, as "double rent" for Heritage House of Richmond during May and June of 2002 (the "Double Rent Claim"). Trinat, Hoosier and the Committee have all objected to this claim, asserting that Trinat's obligation to pay this rent ended in December of 2001. In order to examine the parties' dispute, a lengthy review of the facts is required.
On October 1, 1998, the Landlords entered into an Agreement and Option to Purchase/Sell Assets with Hoosier Living Centers. As its name would suggest, this agreement gave Hoosier Living Centers the option to purchase certain nursing home facilities, as well as certain related personal property, owned by the Landlords. The agreement was later assigned to Trinat by virtue of an Agreement and Option to Purchase/Sell Assets of Ten Nursing Facilities (the "Assigned Purchase Option"), executed on April 30, 2001 (collectively, the "Purchase Option").
The Purchase Option created three "call periods," the first of which ran from June 1, 2001 to September 30, 2001. During these periods, Trinat could exercise its option to purchase, at most, two of the ten subject facilities. Upon exercising a "call," Trinat would then have 180 days to close the sale. Upon failing to do so, the Landlords had the right to terminate all of its leases with Trinat.
On April 30, 2001, pursuant to the First Addendum to the Agreement and Option to Purchase (the "First Addendum"), Trinat exercised its "call" with respect to Heritage House of Connersville and Heritage House of Richmond — collectively referred to in the First Addendum as the "2001 Facilities." According to the First Addendum, the closing date for the purchase was to be August 30, 2001, which date could be extended only "by the mutual written agreement of Purchaser and Owners of the 2001 Facilities. . . ."
Under the First Addendum, Trinat also agreed to pay an "additional amount equal to the monthly Base Rent for each of the 2001 Facilities, commencing in April of 2001 and continuing until the closing date." This "double rent" was "deemed for all purposes as a prepayment of the Purchase Price for the Facilities." The double rent could, however, be retained by the owners of the 2001 Facilities as "liquidated damages" should Trinat fail to close the sale by the established closing date. This obligation was incorporated into the Lease by virtue of the First Amendment to Lease and Security Agreement (the "Amended Lease"), executed by the parties on April 30, 2001.
Pursuant to the Second Addendum to Agreement and Option to Purchase/Sell Assets of Ten Nursing Facilities (the "Second Addendum"), Trinat and the Landlords extended the closing date for the 2001 Facilities to December 31, 2001. Again, the Second Addendum provided that the closing date could be further extended only upon the parties' mutual, written consent. No further written extension was executed by the parties. On December 26, 2001, Trinat was able to close its purchase of Heritage House of Connersville but was unable to close on Heritage House of Richmond ("Richmond") by December 31, 2001. Trinat continued to pay "double rent" for Richmond even after the closing date expired.
By a letter dated March 28, 2002, the Landlords made demand on Trinat to proceed with the sale within 30 days; otherwise, the Landlords would "proceed with the remedies available to them under § 8.6 and 9.1 of the Purchase Agreement." In other words, the Landlords threatened to terminate its leases. Trinat, commenced its Chapter 11 bankruptcy, approximately 18 days later, presumably to prevent or delay that from happening. The Landlords now seek to recover, under Code § 365(d)(3), the "double rent" for Richmond allegedly due for May and June of 2002, i.e., the amount which became due during the post-petition/pre-rejection period.
The Landlords' § 365(d)(3) Double Rent Claim rests on the assumption that such rent was, in fact, required to be paid under the Lease for May and June of 2002. The Court does not agree with this assumption. According to the First Addendum, Trinat's obligation to pay "double rent" expired on the "closing date," which was ultimately established per the Second Addendum to be December 31, 2001. As clearly set forth in both the First and Second Addendum, the closing date could only be extended by the parties' mutual, written consent. No further written extension was executed by the parties. Therefore, Trinat's contractual obligation to pay double rent for Richmond expired on December 31, 2001, several months before the Petition Date. As such, the Court denies the Landlords' Double Rent Claim. The fact that Trinat continued to make double rent payments until the bankruptcy case was filed or that Trinat may have received a benefit from the Landlords' forbearance under the Lease is irrelevant for § 365(d)(3) purposes.
An adversary case is currently pending that seeks to avoid these transfers under Code § 548.
The Landlords have not explicitly argued that they are entitled to receive the double rent under any quasi-contract or estoppel theory. While such theories, if they had been presented, could arguably have supported either a general unsecured or administrative expense claim for the double rent, they would not support an argument under § 365(d)(3) since amounts paid pursuant to that section must arise under an unexpired lease.
4. 2001 Additional Rent
Section 2.2(a) of the Lease, as amended by the Second Amendment to the Lease and Security Agreement (the "Second Amended Lease") dated August 30, 2001, provides in relevant part:
[I]n addition to base rent, Tenant shall pay as additional rent for each calendar year an amount equal to 50% of the amount, if any, by which Actual Net Income, as hereafter defined, for such calendar year, shall have exceeded the Base Net Income, as hereafter defined ("Additional Rent"); provided, however, commencing with calendar year 2001 and continuing each calendar year thereafter, the Additional Rent for each year shall be limited to the lesser of (i) the Additional Rent determined as set forth above, or (ii) $100,000.00.
Section 2.2(b) of the Second Amended Lease provides further:
Within 60 days after the end of each calendar year, Tenant shall advise Landlord of the amount of the Additional Rent for the preceding year and shall make available such records, if any, as Landlord reasonably shall request to verify the Additional Rent calculation. Concurrently, Tenant shall pay to Landlord the amount of Additional Rent which Tenant has calculated ("Preliminary Additional Rent").
Trinat did not timely inform the Landlords of the amount due as additional rent, nor did they provide the information needed to make such a calculation or pay any amount as Preliminary Additional Rent. Thus, as of the Petition Date, these amounts remained unpaid.
Following the commencement of the case, Trinat finally provided the Landlords with the information needed to calculate the additional rent due for 2001. According to their calculations, the Landlords argue that $335,180.00 (the "2001 Additional Rent Claim") is now due pursuant to § 365(d)(3). Again, Trinat, Hoosier and the Committee have all objected.
There is no dispute that Trinat failed to comply with § 2.2(b) of the Second Amended Lease, thereby making it impossible for the Landlords to fix the amount due as additional rent for 2001. However, the mere fact that the debt was not liquidated as of the Petition Date does not change the nature of the Landlords' claim. Bankruptcy schedules themselves acknowledge that not all pre-petition debts are liquidated as of the petition date. Rather, it would appear that Trinat's obligation to pay the Additional Rent, like its obligation to pay the 2001 taxes, arose on a "piecemeal" basis every day of 2001. Consistent with the Seventh Circuit's logic in Handy Andy, the Court must conclude that the 2001 Additional Rent Claim constitutes a pre-petition debt and is not payable pursuant to § 365(d)(3).
The parties also dispute the amount of 2001 Additional Rent claimed by the Landlords. The Landlords' calculation includes $100,000.00 for the Heritage House of Connersville facility ("Connersville"). Trinat insists that this amount should be excluded from the calculation, insisting that the parties intended to exclude the income from any facility sold during a given year under the Purchase Option from that year's additional-rent calculation.
In support of this argument, Trinat relies solely on evidence extrinsic to the Lease, i.e., the testimony of David Reed as to the intentions behind § 2.2 in the Lease and § 3.1 of the Purchase Option. However, under the parol evidence rule, a court may not resort to extrinsic evidence to discern the meaning of a document if the document itself is unambiguous on its face. Indeed, according to the rule, extrinsic evidence is not admissible to clarify or modify the terms of a written instrument if the terms of the instrument are clear and unambiguous. Depew v. Burkle, 786 N.E.2d 1144, 1148 (Ind.Ct.App. 2003) (citing Cooper v. Cooper, 730 N.E.2d 212, 215 (Ind.Ct.App. 2000)).
It cannot be said that § 2.2 of the Amended Lease is ambiguous. Rather, it clearly requires the payment of additional rent for each calendar year based upon each facility's annual income, without reference to whether the facility is sold prior to the close of that year. The Court need not nor cannot resort to extrinsic evidence in an effort to condition the additional rent requirement, as suggested by the Debtor. Consequently, the Landlords' claim, while disallowed under § 365(d)(3) is allowable as a general unsecured claim in the amount of $335,180.00.
5. 2002 Additional Rent
The Landlords also seek to recover, pursuant to § 365(d)(3), the amounts due under § 2.2(b) of the Amended Lease for the post-petition/pre-rejection period. The parties agree, based upon Handy Andy, that the amount due as additional rent for this period is payable pursuant to § 365(d)(3). However, in order to calculate the appropriate amount, the Landlords seek an order from the Court directing Trinat to provide the necessary information. Trinat has agreed to cooperate in this regard. In any event, the Court hereby orders Trinat to provide all information reasonably requested by the Landlords so that the 2002 additional rent may be calculated, and to cooperate in all other regards with the necessary computation.
III. Conclusion
For the reasons stated herein, the Motion is granted as it relates to the Landlords' Washing Machine Lease Claim (as per the parties' stipulation), 2002 Tax Claim, and 2002 Additional Rent Claim. The Motion is denied, however, as it relates to the Landlords' 2001 Tax Claim, Double Rent Claim and 2001 Additional Rent Claim. Additionally, the Court will conduct an additional hearing, as set by separate notice, regarding the Therapy Claim.