In Re Microvideo Learning Systems, Inc.
DECISION ON MOTION BY SUB-LANDLORD FOR IMMEDIATE PAYMENT OF POST PETITION, PRE REJECTION NONRESIDENTIAL REAL PROPERTY RENT PAYMENTS
INTRODUCTION
Calet, Hirsch & Ferrell, Inc. (“CH & F”) moves for an order, pursuant to § 365(d)(3) of the United States Bankruptcy Code (the “Code”) for immediate payment of outstanding post petition, pre rejection rents. 1 Microvideo Learning Systems, Inc. (the “Debtor”) opposes CH & F’s motion on the grounds that it is administratively insolvent. For the reasons set forth below, CH & F’s motion is DENIED.
BACKGROUND
The facts are not in dispute. CH & F, the movant, is the lessee/sub-landlord of the 10th floor of 250 Park Avenue South, New York. The Debtor leased this space from CH & F and used it as its principal place of business.
On July 9, 1998, the Debtor filed a voluntary petition under chapter 11 of the Code. On August 18, 1998, the Debtor moved to extend its time to assume or reject the lease to June 29, 1999, the termination date of both the Debtor’s sublease with CH & F and CH & F’s lease with the building owner. CH & F objected to that motion on the grounds that the Debtor owed it pre and post petition rent. On September 29, 1998, I granted the Debtor’s motion to the extent that its time to assume or reject was extended to January 8, 1999. As a condition to the Order, the Debtor was required to pay CH & F all rents owed from filing of the petition through October 31, 1998 by October 1, 1998. I also included a mechanism for CH & F to lift the automatic stay on shortened notice in the event of a rent default.
On January 7, 1999, the Debtor moved to further extend its time to assume or reject the sublease through June 29, 1999. CH & F again opposed the Debtor’s motion. I denied the motion and the lease was deemed rejected as of February 8, 1999.
See
The Debtor did not pay rent from January 1, 1999 to the lease rejection date, February 8, 1999. CH
&
F argues that it is entitled to immediate payment of $19,-827.96 for that period. The Debtor makes several arguments in opposition to CH & F’s motion, only one of which requires discussion. The Debtor argues that if its assets were liquidated today, the proceeds would not be sufficient to pay the estate’s administrative expense claims in full.
2
DISCUSSION
In support of CH & F’s contention that it is entitled to immediate payment of its post petition, pre rejection claim, CH
&
F relies on
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, notwithstanding section 503(b)(1) of this title....
Congress added this section to the Code in 1984 as part of a series of amendments intended to improve the position of lessors of nonresidential real property.
See
William L. Norton, Jr.,
Norton Bankruptcy Law and Practice 2d
§ 42:8 (1998). In particular,
The confusion has arisen, though, where, as here, the debtor does not timely pay all of its post petition, pre rejection rent obligations and is administratively insolvent. The problem stems from the fact that the Code provides a mandate, timely rent payment, but does not specify a remedy in the event of a default.
See In re Rich’s Dep’t Stores, Inc.,
The Second Circuit has not addressed this issue and there is a split in the authority among the courts that have looked at this problem. The vast majority of courts have held that
The majority and the minority each contend that they are embracing the “plain meaning” of the statute.
See United States v. Ron Pair Enters., Inc.,
The problems that courts have faced in deciphering Congress’s intent in drafting this section have revolved around the phrase “shall timely perform.” Taken alone, as the minority does, it appears to be an unequivocal mandate of immediate performance. It is its view that to apply a condition to the payment or to read the language in conjunction with other sections of the code is to engage in judicial legislating.
See In re Telesphere Communications, Inc.,
The minority analogizes the payment of post petition rent under
I do not agree with this reasoning. I believe that this reading of the statute reaches conclusions that are not embodied in the Code and overlooks a fundamental principle in statutory construction.
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First, the minority courts conclude that Congress intended to bestow super-priority status on landlords’ post petition, pre rejection claims although the Code is devoid of any such language. Yet, in the three other sections of the Code that confer such treatment, the statute is explicit.
See
§§ 507(b) (stating that in certain situations where adequate protection provided to a secured creditor is inadequate “then such creditor’s claim under such subsection shall have priority over every other claim allowable under such subsection”); 364(c)(1) (providing that the court, after notice and a hearing, may give claims of post petition lenders “priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title”); 726(b) (granting chapter 7 administrative expense claims “in a case that has been converted to [chapter 7] ... priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title or under this chapter before such conversion and over any expenses of a custodian superseded under section 543 of this title.”).
See also In re Granada,
Second, as a matter of fundamental statutory interpretation, no super-priority status can be read into
Before 1984, it was common practice, in many jurisdictions, for debtors not to pay any post petition rent until they had decided whether to assume or reject the lease.
See In re J.T. Rapps, Inc.,
It is with that practice in mind that
Third, the implied super-priority theory fails to account for the fact that the other super-priority administrative expense categories are not on a par with each other. Thus, if a court decides that
One court, which was initially in the implied super-priority camp, had just such a problem. In
In re McCabe,
Two years later, in
In re MJ 500, Inc.,
The court was faced with the problem of either following its decision in McCabe and paying the landlord, effectively denying the chapter 7 trustee any compensation for his efforts in building an estate, or to find that the holding in McCabe is less than universal. This problem was magnified by the express grant of super-priority treatment given to chapter 7 administrative expenses over chapter 11 administrative expenses when a case has converted from chapter 11 to chapter 7. See § 726(b). Unable to harmonize McCabe with MJ 500 and the mandates of the Code, the court conceded that the effect of the McCabe “holding was to give the rent priority over other administrative claims and thus to violate the Bankruptcy Code’s express priority scheme.” Id. 8
Finally, I address the most recent case in the Southern District on this issue,
In
re
Pudgie’s Dev. of N.Y., Inc.
Actually, there are two published
Pudgie’s
opinions on point,
Judge Hardin concluded, after noting the split of authority on the immediate payment issue, that the landlords were entitled to immediate payment of then-post petition rents.
Id.
at 836. In doing so, he adopted the reasoning of Judge Wedoff in
In re Telesphere,
Importantly, though, the issue of administrative insolvency was not raised in
Pudgie’s I.
That was the topic of
Pudgie’s II.
By 1998 it became clear that the debtor would not be able to reorganize and it was sold.
Pudgie’s II,
at 422. It was also clear that the estate was administratively insolvent.
Id.
Despite the administrative insolvency of the debtors, several landlords sought super-priority treatment of their post petition, pre rejection rent claims pursuant to
The landlords argue that the “timely performance” requirement ofSection 365(d)(3) gives them a superpriority administrative claim for rent which is not timely paid. The argument stretches the statute beyond its limits. Although this Court adheres to the view thatSection 365(d)(3) grants a landlord a right to timely payment of post-petition rent obligations, if that right is not enforced by the landlord the statute does not give the landlord a superpriority claim for accrued but unpaid rent, to the prejudice of other administrative or priority claims. See, e.g., In re Joseph Spiess Co.,145 B.R. 597 , 608 (Bankr.N.D.Ill.1992) (“This language [of timely performance] in no way, however, expressly elevates these post-petition obligations to super-priority status. Only section 364 contains any such language”); In re Wingspread Corp.,116 B.R. at 932 (“section 365(d)(3) does not serve as the basis for a superpriority claim”).
Id.
Here, I am faced with an administratively insolvent debtor. As a result, when an administrative expense is paid will determine whether it is going to paid at all.
See In re Joseph C. Spiess Co.,
CONCLUSION
For the reasons set forth above, CH & F’s motion for immediate payment of post petition, pre rejection lease payments is DENIED.
Settle Order.
Notes
. The court has jurisdiction over this proceeding pursuant to
. The Debtor’s status as a going concern and its viability are in serious question. The Debt- or is in the process of liquidating its assets and it believes that a liquidation will not
. Section 503(b) of the Code provides, in relevant part:
(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, including wages, salaries, or commissions for services rendered after the commencement of the case....
. To the extent that this issue is still in question, I need not decide it here. The Debtor has not alleged that the lease involved here
. Section 363(c)(1) provides:
If the business of the debtor is authorized to be operated under section 721, 1108, 1203, 1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.
. Section 1108 provides:
Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor's business.
II U.S.C. § 1108(1998).
. Even if I were to adopt the
. Judge Kenner did not completely abandon her holding in
McCabe.
Instead, she conclud