IN RE: MONTGOMERY WARD HOLDING CORP., Debtor, CENTERPOINT PROPERTIES, Appellant, v. MONTGOMERY WARD HOLDING CORP.
NO. 99-6140
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
October 10, 2001
On Appeal From the United States District Court For the District of Delaware (D.C. Civil Action No. 98-cv-00338). District Judge: Honorable Joseph J. Farnan, Jr. Argued April 3, 2001
(Opinion Filed: October 10, 2001)
Richard A. Chesley, Michael J. Gray (Argued), Jones, Day, Reavis & Pogue, 77 West Wacker Drive, Chicago, IL 60601, Attorneys for Appellee
OPINION OF THE COURT
STAPLETON, Circuit Judge:
This appeal presents us with a narrow question of statutory interpretation.
I.
On September 7, 1995, Montgomery Ward Holding Corporation (“Montgomery Ward“), executed a lease on a commercial property in Illinois owned by CenterPoint Properties Trust (“CenterPoint“). Two of the provisions of the lease require Montgomery Ward to reimburse
Upon receipt of an invoice from [CenterPoint], [Montgomery Ward] further agrees to pay before any fine, penalty, or interest or cost may be added thereto for the nonpayment thereof, as Additional Rent for the Premises, all Taxes . . . levied, assessed or imposed upon the Premises or any part thereof accruing during the Term of this Lease, notwithstanding that such Taxes may not be due and payable until after the expiration of the Term of this Lease. . . .
An additional term of the Lease found in Section 6.3, provides for a “security deposit” mechanism which operates as follows:
As security for [Montgomery Ward‘s] obligation to pay for Taxes assessed for 1996 and 1997, unless the same were otherwise paid by [Montgomery Ward] prior to the expiration of the Term, [Montgomery Ward] agrees to deposit with [CenterPoint], or such other entity as [CenterPoint] may designate, no later than thirty (30) days prior to the expiration of the Term an amount equal to one hundred percent (100%) of the most recent ascertainable Taxes. . . . [Montgomery Ward‘s] payment of the deposit shall be credited against the Taxes due. . . .
Thus, two separate lease provisions obligate Montgomery Ward to reimburse CenterPoint for tax liabilities incurred during the term of the lease.
On July 7, 1997, Montgomery Ward filed for bankruptcy under Chapter 11. Montgomery Ward continued to make use of the premises as a debtor-in-possession pursuant to
On July 11, 1997, CenterPoint sent three invoices to Montgomery Ward. The first invoice was for a first installment of 1996 taxes (payable in 1997) in the amount of $320,404.40. The second invoice was for an estimated second installment of 1996 taxes in the amount of
Montgomery Ward did not remit payment for either of the first two invoices, but remitted $96,584.95 as payment for the third invoice. This amount represented the prorated portion of taxes attributable to the period subsequent to Montgomery Ward‘s petition for bankruptcy relief. Montgomery Ward took the position that all taxes attributable to a pre-petition period constituted unsecured claims.1
On September 15, 1997, CenterPoint filed a motion pursuant to
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.
CenterPoint argued that all the invoices were payable immediately as “obligations of [Montgomery Ward] . . . arising from . . . the lease” after the order for relief.2
The Bankruptcy Court decided in favor of Montgomery Ward. CenterPoint appealed this decision to the District Court for the District of Delaware, which affirmed the decision of the Bankruptcy Court. CenterPoint again appeals.
The Bankruptcy Court had subject matter jurisdiction pursuant to
II.
The issue for resolution then is what Congress meant when it referred to “obligations of the debtor arising under
We believe that to state these questions is to answer them. The clear and express intent of
The term “obligation” is not defined in the Code, and it is thus apparently used in its commonly understood sense. Black‘s Law Dictionary defines it as “[t]hat which a person is bound to do or forebear; any duty imposed by law, promise, contract, relations of society, courtesy, kindness, etc.” Black‘s Law Dictionary 968-69 (5th ed. 1979). In the context of a lease contract, it seems to us that the most straightforward understanding of an obligation is something that one is legally required to perform under the terms of the lease and that such an obligation arises when one becomes legally obligated to perform.
While Montgomery Ward insists that the statutory text is ambiguous, it has not advanced a plausible reading that seems to us consistent with that text. Several courts that have adopted a proration approach have suggested that such an approach can be reconciled with the text by interpreting “obligation” in light of the statutorily defined term “claim.” See, e.g., Child World, Inc. v. Campbell/Massachusetts Trust (In re Child World, Inc.), 161 B.R. 571, 574 (S.D.N.Y. 1993). The tenant has an “obligation” when the landlord has a “claim.” The Code, of course, defines “claim” as including an “unmatured right to
Finding a straightforward interpretation that produces a rational result and no other reasonable interpretation consistent with the text, we are constrained to hold that
Prior to 1984, landlords who leased premises to a [debtor-in-possession (“DIP“)] sought payment of rent and other postpetition charges as administrative
See Joshua Fruchter, To Bind or Not to Bind -- Bankruptcy Code
In 1984, Congress adopted
This subtitle contains three major substantive provisions which are intended to remedy serious problems caused shopping centers and their solvent tenants by the administration of the bankruptcy code. . . . 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
H.R. Rep. No. 882, 95th Cong., 2d Sess., reprinted in 1984 U.S.C.C.A.N. 576 (emphasis added). Senator Hatch‘s statements seem to us to confirm that Congress intended that the debtor in possession perform “all the obligations . . . at the time required in the lease.” See In re Krystal Co., 194 B.R. 161, 164 (E.D. Tenn. 1996) (finding legislative history supports “time required in the lease” theory).4
We are not alone in holding that an obligation arises under a lease for the purposes of
We reach the conclusion that
Contrary to the suggestion of Montgomery Ward, we do not find our decision in In re Columbia Gas Transmission Corp., 37 F.3d 982 (3d Cir. 1994), to be helpful in resolving the issue before us. As Montgomery Ward stresses, we there observed that a tax liability is generally “incurred on the date it accrues, not on the date of the assessment or date on which it is payable.” Id. at 985. Columbia Gas did not involve a lease, however, and, accordingly, did not call upon us to interpret
III.
Montgomery Ward‘s lease obligation to reimburse CenterPoint for tax payments arose post-order and prior to rejection. Under
The judgment of the District Court will be reversed and this case will be remanded for proceedings consistent with this opinion.
MANSMANN, Circuit Judge, dissenting:
I.
This appeal requires us to determine when a leasehold obligation “arises” for purposes of
II.
The trustee 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.
In the present case, the lease called for reimbursement of taxes when invoiced by the landlord. Shortly after the
The majority‘s holding is predicated on its view that the “fundamental tenet” of
I believe that the true “fundamental tenet” of
The quarrel between the parties is over whether [tenant]‘s “obligation” under the lease could arise before [tenant] was contractually obligated to reimburse [landlord] for the taxes that the latter had paid. . . . [the] ‘billing date’ approach is a possible reading of section 365(d)(3), but it is neither inevitable nor sensible. It is true that [tenant]‘s obligation to [landlord] to pay (or reimburse [landlord] 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 [tenant]‘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, [tenant] would have had a definite obligation to reimburse [landlord] for the 1994 real estate taxes when those taxes were billed to [landlord]. The obligation thus arose, in a perfectly good sense, before the bankruptcy. The obligation to reimburse [landlord] for the first installment of the 1995 taxes likewise arose before the bankruptcy.
Handy Andy, 144 F.3d at 1127. I find this reasoning persuasive, and I would follow it in this case.
The majority finds support for its position in a recent decision by the Sixth Circuit that involved just one month of advance rent rather than a year and a half of back taxes. See In re Koenig Sporting Goods, Inc., 203 F.3d 986 (6th Cir. 2000). Although I disagree with the statutory analysis in Koenig Sporting Goods, it would seem that parceling a continuing obligation into monthly increments is far less subversive of statutory policies than aggregating a year or more of accrued debt for priority purposes. In any event, the Sixth Circuit itself apparently considers the difference
Although some courts have applied the “billing date” approach adopted by the majority today, most decisions have rejected that approach in favor of proration. See, e.g., In re McCrory Corp., 210 B.R. 934, 940 (S.D.N.Y. 1997) (observing that the billing date approach “would result in a windfall either to the landlord or the debtor-tenant“); In re Victory Markets, Inc., 196 B.R. 6 (Bankr. N.D.N.Y. 1996); In re All For A Dollar, Inc., 174 B.R. 358 (Bankr. D. Mass. 1994); In re Child World, Inc., 161 B.R. 571 (S.D.N.Y. 1993) (observing that allowing landlords to recover for pre-petition services billed post-petition “would grant landlords a windfall payment, to the detriment of other creditors“); In re Ames Department Stores, 150 B.R. 107 (Bankr. S.D.N.Y. 1993). Cf. Daugherty v. Kenerco Leasing Co. (In re Swanton Corp.), 584 B.R. 474 (S.D.N.Y. 1986) (rent prorated although lease called for yearly rental payments).2
The proration approach is in keeping with what had been, prior to enactment of
Although, as the majority suggests, Congress clearly intended to change prior practice when it enacted
The majority seeks to marshal support for its interpretation from the remarks of Senator Hatch in the legislative history. However, the Senator‘s observation that the trustee must perform “all the obligations . . . at the time required in the lease” simply has no bearing on the question before us. The quoted passage merely indicates when an obligation must be performed: “at the time required in the lease“, which adds nothing to the statute‘s requirement of “timely” performance. It simply does not address how to determine when the obligation arises.
III.
Because neither the language of the statute nor the legislative history forecloses the District Court‘s common-sense interpretation - one that preserves prior practice and better serves fundamental bankruptcy policies, I would affirm the decision below. Accordingly, I dissent.
A True Copy: Teste:
Clerk of the United States Court of Appeals for the Third Circuit