In Re at Home Corporation, a Delaware Corporation, Debtor. Pacific Shores Development, LLC v. At Home Corporation, Dba Excite at HomeIn Re at Home Corporation, a Delaware Corporation, Debtor. Pacific Shores Development, LLC v. At Home Corporation, Dba Excite at Home
In this appeal, we hold that a bankruptcy court may approve retroactively the rejection of an unexpired nonresidential lease. We adopt the First Circuit’s conclusion in
Thinking Machines Corp. v. Mellon Financial Services Corp.
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1 (In re Thinking Machines Corp.),
BACKGROUND
In happier times, Debtor At Home Corporation was actively engaged in the delivery of “broadband” network services to residential customers. As part of an aggressive growth strategy, in early 2000 Debtor leased two buildings from Pacific Shores Development Corporation, LLC. Debtor placed in escrow approximately $20 million to fund the remodeling of the two leased buildings. Debtor intended to occupy the premises upon completion of the renovation.
But things did not go as planned. Debt- or filed for Chapter 11 bankruptcy protection on September 28, 2001. Although the renovation was “virtually complete” by then, Debtor had never occupied the leased buildings. Debtor did not furnish Pacific Shores with a formal surrender notice before seeking protection under Chapter 11; it feared that Pacific Shores would convert more than $1 million, which remained in the escrow account for remodeling, into rent. Indeed, that conversion apparently took place on the same day that Debtor filed its bankruptcy petition.
Also on that same day, Debtor filed an “Emergency Motion for Order Pursuant to
During the “first day emergency motions” hearing on October 1, 2001, Debtor asked the court to schedule a hearing on its motion to reject the leases “early next week.” On October 1 a committee of creditors had not yet formed. Because the following Monday was a court holiday, the bankruptcy court scheduled the hearing for Tuesday, October 9, 2001.
At the October 9 hearing, the bankruptcy court heard argument from Pacific Shores, Debtor, the United States trustee, and the newly formed creditors’ committee. The bankruptcy court then rendered an oral decision in which it concluded that a nunc pro tunc order was appropriate because: (1) Debtor moved to reject the lease immediately upon filing its bankruptcy petition; (2) Debtor set the matter for hearing promptly; (3) Debtor was “not in possession of the premises”; and (4) Pacific Shores opposed nunc pro tunc rejection without having suggested “that this process should be speeded up so that [Pacific Shores] could get ... its indefeasible right to re-let the premises.” In other words, Pacific Shores’s sole “interest [was] in running the administrative rent.” The court later issued a written order approving the retroactive rejection of the leases.
Pacific Shores challenged the bankruptcy court’s order in district court. The district court affirmed the bankruptcy court in a published opinion.
Pac. Shores Dev., LLC v. At Home Corp. (In re At Home Corp.),
STANDARDS OF REVIEW
We conduct an independent review of a bankruptcy court’s decision.
Brewer v. Erwin & Erwin, P.C. (In re Marquam Inv. Corp.),
DISCUSSION
Pacific Shores agrees that, as a general matter, a bankruptcy court may exercise its equitable powers to approve the rejection of a nonresidential lease retroactively. Nonetheless, Pacific Shores contends that the bankruptcy court erred in two respects. First, Pacific Shores argues that the bankruptcy court lacked authority to approve the rejection of the leases to a date before the date on which Pacific Shores, as landlord, regained possession of the premises. Second, Pacific Shores takes issue with the factors on which the bankruptcy court relied in granting Debtor’s motion.
Our task is to identify the authority for, and the limits of, a bankruptcy court’s discretion in this context. We will begin by analyzing
A.
Equitable authority under
1. The Shopping Center Amendments changed the treatment of unexpired nonresidential leases in Chapter 11 bankruptcy proceedings.
The parties’ dispute turns on the text and purpose of
(3) The trustee shall timely perform all the obligations of the debtor, except those specified insection 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, not-withstanding 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.... Acceptance of any such performance does not constitute waiver or relinquishment of the lessor’s rights under such lease or under this title.
(4) ... [I]n a case under any chapter of this title, if the trustee 1 does not assume or reject an unexpired lease of nonresidential real property under which thedebtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.
Those subsections impose two obligations on a trustee or debtor with respect to unexpired nonresidential leases. First,
Those duties arose out of the so-called “Shopping Center Amendments” contained in the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333 (1984). Through those amendments, Congress sought to protect the interests of commercial landlords who, compared to other creditors, were unfairly disadvantaged because they were forced to continue extending credit — in the form of rent — during the pendency of reorganization proceedings. See 130 Cong. Rec. S8891 (1984), reprinted in 1984 U.S.C.C.A.N. 590, 598-99 (statement of Sen. Hatch) (discussing problem).
Specifically, Congress enacted the Shopping Center Amendments to tackle two main problems. “The first problem which [the Amendments] would remedy is the long-term vacancy or partial operation of space by a bankrupt tenant.” Id. at 598. Previously, a debtor could file a Chapter 11 bankruptcy petition and then maintain control of the leased property for the entire duration of the bankruptcy proceedings, even if the debtor had ceased operations and had vacated the premises. The automatic stay prevented the landlord from evicting the debtor or regaining possession of the leased space. The landlord lost money, and the extended vacancy hurt other tenants in the same shopping center as the bankrupt tenant because of decreased customer traffic. Id. at 599.
“A second and related problem is that during the time the debtor has vacated space but has not yet decided whether to assume or reject the lease, the trustee has stopped making payments due under the lease.”
Id.
Again, this problem affected both the landlord and the other shopping-center tenants. “[T]he landlord [was] forced to provide current services — the use of its property, utilities, security, and other services — without current payment.”
Id.
Other tenants could be required to increase their “common area charge payments” to make up for the fact that the bankrupt tenant was no longer contributing to common area charges.
Id.
The landlord eventually received only the court-determined “actual, necessary costs and expenses of preserving the estate,”
The Shopping Center Amendments solved those two problems by ensuring that a commercial tenant who seeks protection under Chapter 11 continues to per
2. Thinking Machines
appropriately recognized bankruptcy courts’ equitable authority under
Soon after Congress enacted the Shopping Center Amendments, courts began to arrive at contrary conclusions with respect to when a lease rejection takes effect. Much depends on that conclusion, because the effective date of rejection determines when a debtor’s obligation to pay rent ceases. Under the “majority view,” the rejection of a lease becomes effective upon entry of a court order approving a trustee’s or debtor’s motion to reject an unexpired nonresidential lease.
See, e.g., Paul Harris Stores, Inc. v. Mabel L. Salter Realty Trust (In re Paul Harris Stores, Inc.),
The First Circuit undertook to mend “the seeming rift in the case law” between the majority and minority views.
Thinking Machines,
Many'bankruptcy courts have since implemented
Thinking Machines’
black-letter rule.
See, e.g., Stonebriar Mall Ltd. P’ship v. CCI Wireless, LLC (In re CCI Wireless, LLC),
Even before
Thinking Machines,
some courts had allowed retroactive rejection of a nonresidential lease, reasoning that nothing in
But statutory silence alone does not invest a bankruptcy court with equitable powers. Those powers are limited and do not amount to a “ ‘roving commission to do equity.’ ”
Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman),
Fortunately, we need look no further than
Similarly,
Thinking Machines
observed that retroactive lease rejection had the “salutary side effect” of acting “as a stimulus to all parties to cooperate in getting the trustee’s motion to reject heard and determined at the earliest practicable date.”
In re Amber’s Stores
is a faithful application of both
Thinking Machines’
black-letter rule and the provisions of
3. The landlord’s possession of the leased premises is not a requirement for retroactive relief.
Pacific Shores argues that the bankruptcy court exceeded its equitable powers by approving the rejection of the leases retroactive to the motion filing date because Debtor, not Pacific Shores, remained in possession of the leased premises on that date. By permitting a rejection predating the landlord’s resumption of possession, Pacific Shores contends, the bankruptcy court thwarted the spirit, if not the letter, of
The relevant provisions of
Congruently, the legislative history refers to a landlord’s possession of leased premises only in connection with proceedings by landlords to regain possession of leased premises when the lease has expired by its own terms. 1984 U.S.C.C.A.N. at 600. Like the statute itself, the legislative history focuses on the period of time- during which “the debtor has vacated space but has not yet decided whether to assume or reject the lease.” Id. at 599 (emphasis added). Indeed, the legislative history consistently stresses Congress’s intention to hasten the trustee’s decision to assume or reject a lease:
[T]enant space has been vacated for extended periods of time before the bankruptcy court forced the trustee to decide whether to assume or reject the lease.
The bill would lessen the problems caused by extended vacancies and partial operation of tenant space by requiring that the trustee decide whether to assume or reject [a] nonresidential real property lease within 60 days....
Id. (emphasis added).
Our earlier cases similarly emphasize the trustee’s decision to reject the lease, rather than the landlord’s eventual possession of the leased premises. In
In re Pacific-Atlantic Trading,
we interpreted “
In the normal course, a landlord will regain possession' of leased premises shortly after the trustee decides to reject the lease, and the estate must pay administrative rent covering the time between those two acts.
See Federated Dep’t Stores,
Adopting the interpretation of
Pacific Shores attempts to accommodate
Jamesway
by arguing that, although
In the absence of explicit direction from the statute itself, we decline to hamstring bankruptcy courts in this way. We prefer the straightforward approach adopted by the bankruptcy courts in cases such as
Jamesway
and
CCI Wireless.
After concluding that nothing in “
Having held that
B. The bankruptcy court’s decision to grant Debtor’s motion.
“[I]n most cases a lease will be considered rejected as of the date of entry of the order approving the rejection, and only in exceptional circumstances ... will the court adopt a retroactive date.”
In re O’Neil Theatres, Inc.,
The bankruptcy court began by commenting that Debtor had moved for rejection of the leases immediately upon filing its bankruptcy petition and had scheduled a hearing “virtually as soon as possible”:
It wasn’t perfect. It wasn’t done absolutely as soon as possible, but it was done without any delay. There, was a holiday in here.... There was neither any deliberate use of a long notice period to keep their options open nor in fact as I can see it any indifference to the timing concerns of the landlord. This is virtually as soon as possible in this particular case.
Pacific Shores takes issue with the bankruptcy court’s conclusion that Debtor set its motion for hearing “virtually as soon as possible.”
The bankruptcy court itself noted that Debtor should have asked Pacific Shores to stipulate to an immediate rejection of the leases upon filing for bankruptcy. It is, of course, speculative whether Pacific Shores would have agreed, knowing that, by doing so, it would lose $1 million in administrative rent. But even if that option had been available, we cannot say that the bankruptcy court’s finding that Debtor moved swiftly to reject the leases is clearly erroneous. The minimal delay in bringing the motion to a hearing was due in part to factors outside Debtor’s control, including a court holiday and the fact that a creditors’ committee had yet to form by the time of the “first day emergency motions.”
Pacific Shores nonetheless argues that, in granting Debtor’s motion, the bankruptcy court improperly shifted the burden of justifying delay to the landlord. As we noted in
Pacific-Atlantic Trading,
“[b]y requiring the trustee to timely pay the debtor’s rent, Congress clearly placed the burden on the trustee to promptly and properly reject the lease if it has no intention of assuming it.”
This argument misunderstands the import of the bankruptcy court’s finding. The bankruptcy court did not require Pacific Shores to bear the costs associated with a delay. Rather, the court concluded that there was no appreciable delay in the first place. That conclusion is consistent with the approach taken by other bankruptcy courts in similar situations. In
Paul Harris Stores,
for example, the court held that the effective date of rejection was the date on which the court approved the motion to reject, in part because “[t]he gap i[n] this case — four months, due in part to extensions of time — could hardly be considered small.”
The bankruptcy court found that Debtor brought its motion before the court at the earliest practicable date.
See Thinking Machines,
The bankruptcy court next looked to the fact that Debtor never occupied the leased premises.
5
The circumstances of this case are truly unusual; Debtor paid rent on the two leased buildings for more than a year without ever occupying either one. Although we have found no identical cases, those that discuss a tenant’s decision whether to vacate the leased premises provide an instructive parallel. In
In re ChiChi’s, Inc.,
the court denied retroactive relief in part because the tenants remained on the premises even after the entry of the court’s order.
Pacific Shores stresses the legal consequence of the automatic stay. Whether or not the bankrupt tenant has vacated the premises, the landlord cannot re-let the premises while the automatic stay is in effect. So, argues Pacific Shores, occupancy is irrelevant.
But the bankruptcy court focused on the practical effect, rather than the legal significance, of the lack of occupancy. By not occupying the premises, Debtor made “it easier for the landlord to re-let [the buildings].” Nothing in the statute, in the precedents, or in logic precludes the bankruptcy court from considering the practical effects of a tenant’s lack of occupancy when balancing the equities in the context of
3. The landlord’s conduct and motives.
Finally, the bankruptcy court “note[d] that the landlord’s opposition was to any [nunc pro tunc] effect generally without any suggestion here that this process should be speeded up so that ... the landlord could get its indefeasible right to relet the premises more quickly.” The court granted the relief requested in part because it was “convinced that the opposition to this relief is motivated by the landlord’s interest in running the administrative rent ... [rather than by] a concern to get this indisputable right to start re-letting the premises as quickly as possible.”
A landlord’s conduct and motives are relevant to a bankruptcy court’s equitable deliberations. For instance,
Jamesway
rested its decision to approve the retroactive rejection of a lease exclusively on the landlord’s delay of the hearing on the debt- or’s motion.
Relying on
Pacific-Atlantic Trading,
as well as our later decision in
Cukierman,
Pacific Shores contends that we have placed that factor beyond the consideration of the bankruptcy court.
Pacific-Atlantic Trading
held that the contractual rate of rent, rather than the value of the trustee’s use of the property, was entitled to administrative priority under
That bright-line rule governs the calculation of administrative rent, but it does not render the amount of rent irrelevant to the equitable balancing that a court must perform when deciding whether to approve a motion to. reject a lease retroactively. As the district court succinctly explained,
for purposes of calculating administrative expenses under
At Home Corp.,
As did the First Circuit in
Thinking Machines,
“we eschew any attempt to spell out the range of circumstances that might justify the use of a bankruptcy court’s equitable powers in this fashion.”
CONCLUSION
We agree with the First Circuit’s holding in Thinking Machines that a bankruptcy court has discretion to grant a motion to reject a nonresidential lease retroactively. The retroactive date of re- ■ jection need not be on or after the date on which the landlord regains possession. In view of those holdings, the only remaining question is whether the bankruptcy court abused its discretion in granting Debtor’s motion here. We conclude that it did not.
AFFIRMED.
Notes
. Although
. Court approval is unnecessary only when a lease is "deemed rejected,” pursuant to
. In adopting that approach, we necessarily reject Pacific Shores’s alternative argument that
. Paul Harris Stores addressed the issue of when lease rejection is effective under the statute, rather than the factors to consider in a court's exercise of its equitable powers. Yet the case is instructive insofar as it shows that there is a meaningful distinction between a delay of ¿ few days and a delay of a few months.
. In its order, the bankruptcy court said that "the Debtor is not in possession of the premises.” (Emphasis added.) As Pacific Shores argued below, and as the district court correctly concluded, the bankruptcy court most likely intended a different meaning: "the bankruptcy court was referring to the fact that At Home did not occupy the premises since construction was still ongoing for the buildings in question.” At Home Corp., 292 B.R. at 203. We agree with the district court’s interpretation of the bankruptcy court’s oral ruling