In Re Joseph C. Spiess Co.
MEMORANDUM OPINION
This matter originates from Joseph C. Spiess Company’s rejection of a non-residential realty lease with Rouse-Randhurst Shopping Center. The Court approved the rejection on March 9, 1992, but reserved ruling on the Debtor’s request to authorize the rejection as of March 1, 1992. After reviewing the pleadings filed and considering the arguments of counsel, the Court hereby finds the effective rejection of a non-residential realty lease with Rouse-Randhurst Shopping Center occurred on March 1, 1992. Further, the Court denies Rouse-Randhurst Shopping Center’s re
JURISDICTION
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A), (M), and (0).
FACTS and BACKGROUND
Sometime around October 1, 1986, Joseph C. Spiess Company (“Spiess” or “Debtor”), executed a lease of approximately 61,000 square feet of retail space at the Rouse-Randhurst Shopping Center, Mt. Prospect, Illinois (the “Premises”) with La-Salle National Bank. Eventually, the Maryland Corporation of Rouse-Randhurst Shopping Center Inc. (“Rouse”) succeeded to the interest of LaSalle National Bank. During the term of the lease, Spiess operated a retail department store at the Premises.
On December 23, 1991, Spiess filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. (hereinafter referred to as the “Code”). Shortly thereafter, the Debtor held a going-out-of-business sale, ceased operations on January 31, 1992, and removed its fixtures and vacated the Premises on February 17,1992. Pursuant to the Debtor’s motion filed the next day, the Court extended until April 20, 1992, the time during which the Debtor had to assume or reject its executory contracts and leases. Less than two weeks later (February 29, 1992), the Debtor served Rouse with notice of the Debtor’s intent to reject the lease of the Premises.
On March 9, 1992, the Court heard the Debtor’s request to reject the lease, and granted relief of same, but reserved ruling on whether the Debtor’s rejection should apply retroactively to March 1, 1992. In addition to arguing that the Debtor’s rejection should not be retroactive, Rouse claimed that all rental payments accrued post-petition should be paid immediately as an administrative expense. Because this issue was not before the Court, the Court advised Rouse to file a motion requesting said relief. Rouse complied by filing a motion to compel compliance with 11 U.S.C. § 365(d)(3) which the Court heard on May 30, 1992. Both matters were thereafter taken under advisement.
ARGUMENTS OF THE PARTIES
The present dispute concerns the rejection of an unexpired non-residential lease. The Debtor contends that its rejection of same should operate retroactively to March 1, 1992, the date the Debtor served its motion to reject. The Debtor reasons that court approval is not a condition precedent to rejection, and further contends that a lessor should not be preferred by virtue of a delay in awaiting court approval. Rouse on the other hand argues that the Debtor’s rejection should not be effective until the Court approves same, and thus concludes that this Court should find the actual date of rejection to be March 9, 1992.
As a separate matter, Rouse contends that the Debtor should make immediate payment of rent accrued post-petition through the effective date of rejection. Rouse relies upon the wording of Section 365(d)(3) which requires the trustee to make timely payments of rent. The Debt- or counters by arguing that nothing compels it 1 to make immediate payment of expenses accrued post-petition when the lease is rejected, but rather that it need only pay such expenses in accord with Section 507; otherwise, Rouse would receive an unintended super-priority.
ISSUES
Thus, the Court is faced with deciding two issues: (1) whether the effective date of the Debtor's rejection is the date the Debtor served its motion to reject, the date the Court heard Debtor’s motion to reject
DISCUSSION
Section 365 governs the duties and obligations of the trustee with regard to execu-tory contracts and unexpired leases. Section 365(a) provides:
(a) Except as provided in section 765 and 766 of this title and in subsections (b), (c), and (d) of this section, the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.
Section 365(d)(3) provides:
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.
Finally, Section 365(d)(4) provides:
Notwithstanding paragraphs (1) and (2), in a ease under any chapter of this title, if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor 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.
11 U.S.C. § 365(a), (d)(3) and (d)(4) (1988).
Whether Section 365 compels court approval as a condition precedent to the rejection of an unexpired lease
The Court finds neither the plain language of or past practice under Section 365(d), nor the policy underlying payment of an administrative expense support a finding that rejection of an unexpired nonresidential lease should be the date the court approves same. The Court's analysis begins with the plain language of Section 365(a).
Plain language
The U.S. Supreme Court has counseled that a court should read a statute according to its literal terms,
e.g., United States v. Locke,
Section 365 contemplates two distinct actions — one by the trustee and one by the court. The trustee assumes or rejects, and the court approves — nothing suggests the court authorizes. Although the Code does not specify how the trustee is to assume or reject a lease, it certainly makes clear that the trustee’s actions are different from and independent of the court’s. For example, Section 365(a) places the burden upon the trustee to ensure that a lease is assumed or rejected. If the trustee fails to take any action, then Section 365(d) treats the lease as rejected automatically
Past practice
In addition to the plain language, courts have long recognized that assumption or rejection of an unexpired lease may occur prior to court approval. Prior court construction plays an integral role in construing Code sections because “[wjhen Congress amends the bankruptcy laws, it does not write ‘on a clean slate.’ ”
Dewsnup v. Timm,
— U.S. -, -,
Rejecting a lease, like assuming a lease, has been recognized as being effective on the day of notifying the lessor of such intent. Under pre-amendment Section 365(d)(1),
3
the trustee had sixty days to assume or reject an executory contract or unexpired lease. Courts construed this time limitation as applying to only the trustee’s decision to assume or reject, not to the court’s approval of that decision, and held that the court may act outside of sixty-day time limitation as long as the trustee has acted within the time frame.
See, e.g., In re Price Chopper Supermarkets, Inc.,
In
Price,
for example, the court faced the issue of when a trustee’s rejection of a collective bargaining agreement occurred— the date of court approval or the date of the trustee’s unilateral rejection. Noting that most unexpired leases would be rejected by the Chapter 7 trustee, the court emphasized that pre-authorization to reject would “undoubtedly create a considerable administrative burden.”
The same treatment occurred with a trustee’s assumption of an unexpired lease. In
Avery,
the trustee advised the landlord prior to the expiration of the sixty day period that he intended to assign the lease to a third party which the landlord acknowledged.
As the
Price
and
Avery
decisions demonstrate, Congress had clear direction that court approval occurring subsequent to any assumption or rejection related back to the
Moreover, the U.S. Supreme Court has counseled that courts should be “reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history.”
Dewsnup v. Timm,
— U.S. at -,
Under the Code as it existed prior to the 1984 amendments, a Chapter 11 debtor had until confirmation of a plan or reorganization to elect to assume or reject an unexpired lease. 11 U.S.C. § 365(d)(2) (1976, supp. II). During this period, a debtor was not required to pay rent but the estate was liable for the reasonable value of the use and occupancy of the premises,
see, e.g., Philadelphia Co. v. Dipple,
The disparate treatment of Chapter 7 and Chapter 11 cases led to obvious inequities. The By-Rite Distributing court noted that:
A trustee in a chapter 7 case had to decide within sixty days after the bankruptcy petition was filed whether or not to assume the lease. Thus, within a reasonable time the landlord of a chapter 7 debtor knew whether or not he still had a tenant and could start collecting rent again. A chapter 11 trustee, on the other hand, could wait almost indefinitely— till confirmation of the plan — to decide to assume the lease; in the meantime, the landlord was left in limbo.
In re By-Rite Distributing, Inc.,
Part of those adopted amendments included Section 365(d)(4). This section includes a sixty-day time limit for all unexpired leases of nonresidential real property which encompasses Chapter 11. In adopting Section 365(d)(4), Congress intended to shorten the trustee’s decision making process, not dictate court calendars:
[Section 365(d)(4) ] 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 the nonresidential real property lease within 60 days afterthe order for relief in a case under any chapter.
130 Cong. Rec. S8891, S8894 (daily ed. June 29, 1984) (statement of Sen. Hatch),
reprinted in
1984 U.S.Code Cong. & Ad. News 576, 590, 598;
see By-Rite Distributing,
Policy
The presumption in bankruptcy cases is that the debtor’s limited resources will be equally distributed. In adopting Section 365, Congress intended to allow the trustee to assume with court approval only those leases which would benefit the estate, and conversely to reject those leases which were unprofitable.
See In re Whitcomb & Keller Mortg. Co.,
These administrative expenses are “the actual, necessary costs and expenses of preserving the estate,” 11 U.S.C. § 503(b)(1)(A), and are paid as a first priority expense. 11 U.S.C. § 507(a)(1). Rental expenses incurred by the Debtor post-petition could qualify as administrative expenses,
In re K-Fabricators, Inc.,
The statutory priorities of Sections 507 and 503 should be narrowly construed. “If one claimant is to be preferred over others, the purpose should be clear from the statute.”
In re United West, Inc.,
Consequently, the Court finds that neither the plain language of or past practice under Section 365(d), nor the policy reasons underlying payment of an administrative expense support a finding that rejection of
Case law
The United States Court of Appeals for the Seventh Circuit has yet to address the issue of when the rejection of an unexpired non-residential lease occurs. Those courts that have done so, however, have reached contrary results. A majority of courts appear to hold that approval is a condition precedent to effective rejection.
See, e.g., In re Four Star Pizza, Inc.,
The
Reveo
decision is the leading case from the camp which advocates court approval as a condition precedent to the rejection of an unexpired non-residential lease.
5
The
Reveo
court begins its analysis by pointing to Bankruptcy Rules 6006 and 9014 as establishing Congress’ intent “to strengthen the role of the court in the assumption/rejection decision making process.”
The differences between former Bankruptcy Rule 607 and current Bankruptcy Rules 6006(a) and 9014 evidence Congressional intent to strengthen the role of the court in the assumption/rejection decision making process_ ‘Court approval’ is now ‘an indispensable step in the process.’
Revco,
Bankruptcy Rule 607 provided that “[wjhenever practicable, the trustee shall obtain approval of the court
before
he assumes a contract.” R.Bankr.P. 607 (emphasis added). As the plain language states, the former rule encouraged the trustee to seek
prior
court authorization to assume a contract. Bankruptcy Rules
The
Reveo
court further reasons that the lessor will be placed in the “unfortunate position of relying on debtor to file a motion for approval of the rejection with the court and await court approval.”
This Court appreciates the desire to protect lessors, but there is simply no indication that Congress intended to protect lessors from all problems incident to a tenant's filing a petition in bankrupt. All creditors — including landlords — should expect some loss, delay or inconvenience. Whatever the loss may be from the delay between a debtor's rejection and court approval of same would constitute the landlord’s cost from doing business with an insolvent tenant — a cost to be borne by the landlord, not the other creditors. Nothing in the Code remotely suggests that landlords should be absolved of all loss from dealing with insolvent or bankrupt tenants. If the lessor truly is concerned about incurring costs due to the tenant’s delay, the lessor always has the option of filing a motion requesting the debtor to assume or reject, thus bringing the issue before the court for prompt resolution.
The Reveo court further reasons that if the trustee rejects a lease which would provide more benefit if assumed, the estate will incur a greater loss, and the court can do nothing because the effective date of rejection is the date of notification:
[I]f after notification of rejection is given, circumstances exist that indicate the lease should not have been rejected (a party is interested in purchasing the lease at a profit to the debtor’s estate) the rejection would still be effective as of the date of notification. Under these circumstances the estate will suffer a loss as the lease was rejected prior to the date the offer to purchase was received.
This line of reasoning, which
Rouse
expressly adopts, overlooks Bankruptcy Rules 6006 and 9014 which protect against such unilateral actions. The trustee administers the estate and is in the best position to weigh factors immediately and act in the best interests of the estate. But no matter what the trustee’s actions (assumption or rejection), they are not the estate. But no matter what the trustee’s actions (assumption or rejection), they are not absolute— they must meet with court approval. 11 U.S.C. § 365(a). Thus, the trustee cannot cause the estate to suffer any loss arising
The most compelling argument for disallowing the retroactive approval of a trustee’s rejection involves the certainty of any such decision. The Reveo court explains that prior court approval is necessary because it provides certainty as to the actual date of rejection. This Court agrees that court approval under Bankruptcy Rule 9014 provides finality as to the trustee’s acts, but the small time gap between notice and hearing does not disturb that certainty so as to require a different result. The Court finds that a trustee’s rejection of a lease should be retroactive to the date that trustee takes affirmative steps to reject said lease such as serving notice of a motion to reject. Consequently, this Court will allow a court approved rejection of an unexpired non-residential lease to apply retroactively to the date the trustee notices the motion requesting same.
In this case the first notice was served March 1, 1992. The Court, therefore, finds that the lease was deemed rejected effective March 1, 1992.
Whether Section 365(d)(3) compels the debtor to make immediate payment of rent accrued post-petition as an administrative expense
In a separate motion, Rouse requests this Court to compel the Debtor to pay immediately, in full, all post-petition rent accrued through the date of rejection since the Debtor entered bankruptcy. According to Rouse, the language of Section 365(d)(3) requires the trustee to timely perform the Debtor’s unexpired lease obligations until the lease is assumed or rejected. Rouse, therefore, concludes that it is entitled to immediate payment of all accrued post-petition rent, which the Debtor has neglected to pay. The Debtor on the other hand argues that Rouse attempts to isolate Section 365(d)(3) to avoid the application of Section 507(a)(1) 8 which specifies the priorities afforded claims against the estate. According to the Debtor, Rouse’s claim should share pro rata with all other Section 507 administrative expenses allowed under Section 503(b). 9 As this Court previously explained, the rejection of Rouse’s lease occurred on the day the Debtor served its motion to reject. Thus, the issue of payment of post-petition obligations runs from the petition date through and including February 29, 1992.
As earlier mentioned, Congress intended to afford lessors some additional protections not afforded others. The lessor to whom Section 365(d)(3) applies is uniquely situated because the lessor becomes necessarily involved both in the debtor’s reorganization (since the lease is an asset of the estate) as well as the debtor’s ongoing business (since the debtor controls the lessor’s property while deciding whether to assume or reject the lease).
In re CSVA, Inc.,
In many bankruptcy cases,
when
a claim is paid makes the difference as to whether it will be paid at all.
In re Virginia Packaging Supply Co.,
Rouse, however, urges the Court to elevate its claim even higher, which raises some interesting priority issues. If, for example, this Court permits immediate full payment to Rouse without considering the estate’s possible administrative insolvency, then creditors with administrative claims of equal priority under Section 507(a)(1) may receive a dividend smaller than that awarded to the lessor. Permitting such payment in essence gives the lessor “super-priority” status by elevating the lessor ahead of other administrative creditors. Recognizing such status operates to the detriment of other administrative creditors by precluding recovery of these funds in the event the estate becomes administratively insolvent.
In re Cardinal Industries, Inc.,
Several number of courts have approved of such “super-priority” status for Section 365(d)(3) obligations.
13
A large number of
CONCLUSION
Based upon the foregoing reasons, the Court finds the Debtor rejected its lease with Rouse on the date it filed its motion to reject same, and not the date the Court approved same. The Court further denies Rouse’s request to receive payment of rent accrued post-petition immediately.
Notes
. Section 1107 of the Code gives a debtor-in-possession essentially all of the powers of a trustee. Any reference in this Opinion to a Chapter 11 trustee also includes a debtor-in-possession, such as Spiess.
. See discussion infra p. 605 explaining the import of the Code adoption of Bankruptcy Rules 6006(a) and 9014 and their treatment of the bankruptcy court’s role as protector, not participant.
. Section 365(d)(1) provided:
(d)(1) In a case under chapter 7 of this title, if the trustee does not assume or reject an exec-utory contract or unexpired lease of the debt- or within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.
11 U.S.C. § 365 (1976, supp. II).
. According to the Seventh Circuit, the policy underlying the provisions of section 503 is to assure priority payment of those post-petition creditors servicing the debtor; otherwise the debtor would be left with no hope of reorganization.
In re Jartran, Inc.,
. Relying upon the reasoning of
Revco
are the decisions of
In re Four Star Pizza, Inc.,
. Bankruptcy Rule 6006(a) provides:
A proceeding to assume, reject, or assign an executory contract, or unexpired lease other than as party of a plan, is governed by Rule 9014
Fed.R.Bankr.P. 6006(a) (1988).
. Bankruptcy Rule 9014 provides in pertinent part:
In a contested matter in a case under the Code not otherwise governed by these rules, relief shall be requested by motion, and reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought. No response is required under this rule unless the court orders an answer to a motion. The motion shall be served in the manner provided for service of a summons and complaint by Rule 7004, ...
Fed.R.Bankr.P. 9014 (1988).
. Section 507 provides in pertinent part that:
(a) The following expenses and claims have priority in the following order:
(1) First, administrative expenses allowed under section 503(b) of this title ...
11 U.S.C. § 507(a)(1) (1988).
. Section 503 provides in relevant part that:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—
(1)(A) the actual, necessary costs and expenses of preserving the estate ...
11 U.S.C. 503(b)(1) (1988).
. See Section 366(b), which permits a utility to "alter, refuse, or discontinue service if neither the trustee nor the debtor, within 20 days after the date of the order for relief, furnishes adequate assurance of payment, in the form of a deposit or other security, for service after such a date."
. “There are no reported opinions concerning immediate payment of business expenses, but Collier states,
While the courts deal gingerly with the payment of professionals, there is a virtually unstated assumption that ‘ordinary course of business’ administrative expenses (such as current post-petition wages and trade debt)will be paid when due. The courts have not dealt with the question of whether these funds must be refunded if, later, there remains insufficient money for other administrative expenses.” 3 Collier on Bankruptcy 15th ed. ¶ 503.01
In re Pacific Forest Industries, Inc.,
. The legislative history to Section 365(d)(3) also echoes Congress concern over the lessor's involuntary status.
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. These payments include rent due the landlord and common charges which are paid by all the tenants according to the amount of space they lease. In this situation, the landlord is forced to provide current services — the use of its property, utilities, security, and other services— without current payment. No other creditor is put in this position. In addition, the other tenants often must increase their common area charge payments to compensate for the trustee's failure to make the required payments for the debtor.
130 Cong.Rec. S8894-95 (daily ed. June 29, 1984) (remarks of Sen. Hatch).
See also In re Dieckhaus Stationers of King of Prussia, Inc.,
.
See, e.g., In re Lunn,
.
See, e.g., In re CSV A, Inc.,