Lead Opinion
OPINION OF THE COURT
This аppeal presents us with a narrow question of statutory interpretation. Section 365 of Title 11 requires that a bankruptcy trustee fulfill all the obligations that arise under a non-residential lease subsequent to the entry of the bankruptcy order and prior to the time that the lease is rejected. Under the terms of the nonresidential lease entered by the debtor in this case, it was required to reimburse the
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 CenterPoint for real estate taxes assessеd on the premises. Section 6.1 of the lease states:
Upon receipt of an invoice from [Center-Point], [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 fоund 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 thе deposit shall be credited against the Taxes due....
Thus, two separate lease provisions obligate Montgomery Ward to reimburse Cen-terPoint 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 §§ 1107 and 1108 of the Bankruptcy Code, but it neither assumed nor rejected the lease prior to the lease’s expiration on September 1,1997.
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 $320,569.70. The third invoice was issued pursuant to Section 6.3 of the lease and covered the 1997 taxes. This was in the amount of $426,729.87.
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 tаxes attributable to a pre-petition period constituted unsecured claims.
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.
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 28 U.S.C. § 157 because CenterPoint’s claim arose in the Chapter 11 bankruptcy case filed by Montgomery Ward. The District Court had appellate jurisdiction over the Bankruptcy Court’s final judgment, order, and decree pursuant to 28 U.S.C. §§ 158(a) and 1334(a). This Court has appellate jurisdiction to review the final order of the District Court pursuant to 28 U.S.C. §§ 158(d) and 1291. We exercise plenary review over the legal question of the proper interpretation of a statute. In re McDonald,
II.
Section 365(d)(3) mandates that “the trustee shall timely perform all the obligations of the debtor ... arising from and after the order for relief under any unexpired lease ..., until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.” 11 U.S.C. § 365(d)(3). There is, of course, a syntactical ambiguity in this text. It is not clear, as a purely formal matter, whether the preposition “from” shоuld be read to modify the most proximate noun, “order,” or the more remote, “lease.” Nevertheless, we will interpret the preposition, as do both parties here, as modifying “lease,” and the requirement as relating to obligations “arising from[,] and after the order of relief under[,] any unexpired lease.” To require a trustee to perform all obligations “arising from ... the order of relief’ would make little sense and would be entirely inconsistent with the legislative history.
The issue for resolution then is what Congress meant when it referred to “obligations of the debtor arising under a lease after the order of relief.” In the factual
We believe that to state these questions is to answer them. The clear and express intent of § 365(d)(3) is to require the trustee to perform the lease in accordanсe with its terms. To be consistent with this intent, any interpretation must look to the terms of the lease to determine both the nature of the “obligation” and when it “arises.” If one accepts this premise, it is difficult to find a textual basis for a pro-ration approach. On the other hand, an approach which calls for the trustee to perform obligations as they become due under the terms of the lease fits comfortably with the statutory text.
The term “obligation” is not defined in the Code, and it is thus apparently used in its commonly understood sense. Black’s Law Dictionary definеs 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 сonsistent 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.),
Finding a straightforward interpretation that produces a rational result and no other reasonable interpretation consistent with the text, we are constrained to hold that § 365(d)(3) is not ambiguous. We thus have no justification for consulting legislative history. Nevertheless, we believe the limited legislative history of § 365(d)(3) is consistent with our reading of the text. The situation existing prior to the adoption of § 365(d)(3) has been accurately described in the literature as follows:
Prior to 1984, landlords who leased premises to a [debtor-in-possession (“DIP”) ] sought payment of rent and other postpetition charges as administrative еxpenses. Several factors, however, made collecting postpetition lease obligations under § 503 an unsatisfactory arrangement. First, a landlord had to comply with the formal and time-consuming procedure of an application, notice, and hearing. Second, a landlord could, upon proper proof, only recover the reasonable value of the DIP’s actual use and occupancy of the premises. The “reasonable value-actual use” standard meant that (i) if a DIP physically occupied only a portion of the premises, it would, in turn, only be liable for the pro rata rent corresponding to the percentage of space actually occupied, and (ii) the court could limit a landlord’s recovery to a fair market rate where the contract rate in the lease appeared clearly unreasonable. Finally, since bankruptcy courts exercise discretion with respect to the timing of the payment of administrative expenses, the court could delay payment of the amount awarded to the landlord until confirmation of a plan. The resulting loss of income impоsed a heavy economic burden on landlords who were forced to provide ongoing services and space to the estate without receiving timely payment to satisfy their own cash obligations.
See Joshua Fruchter, To Bind or Not to Bind — Bankruptcy Code § 365(d)(3): Statutory Minefield, 68 Am. Bankr. L.J. 437, 437 (1994) (emphasis in original; footnotes omitted) [hereinafter “To Bind or Not to Bind"'].
In 1984, Congress adopted § 365(d)(3) as a part of the Bankruptcy Amendments and Federal Judgeship Act of 1984. Virtually all courts have agreed that it was intended to alleviate the above described burdens of landlords by requiring timely compliance with the terms of the lease. As Senator Orrin Hatch, a conferee on the originating act, put it:
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 trustee has stopped making payments under the lease. In this situation, the landlord is forced to provide current services — the use of its property, utilities, secuñty, 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. The bill would lessen these problems by requiring the trustee to perform all the obligations of the debtor under a lease of nonresidential real property at the time required in the lease. This timely performance re*211 quirement will insure that debtor-tenants pay their rent, common area, and other charges on time pending the trustee’s assumption or rejеction of the lease.
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.,
We are not alone in holding that an obligation arises under a lease for the purposes of § 365(d)(3) when the legally enforceable duty to perform arises under that lease. See e.g., In re Koenig Sporting Goods, Inc.,
We reach the conclusion that § 365(d)(3) is unambiguous with some reluctance given that one sister court of appeals and a number of other courts have reached the opposite conclusion and have opted for a proration approach. See, e.g., In re Handy Andy,
Contrary to the suggestion of Montgomery Ward, we do not find our decision in In re Columbia Gas Transmission Corp.,
III.
Montgomery Ward’s lease obligation to reimburse CenterPoint for tax payments arose post-order and prior to rejection. Under § 365(d)(3), Montgomery Ward’s obligation must be fulfilled not in part, but in full.
The judgment of the District Court will be reversed and this case will be remanded for proceedings consistent with this opinion.
Notes
. As the Seventh Circuit noted in In re Handy Andy Home Improvement Centers,
. While section 6.3 did not explicitly contemplate an invoice to trigger payment, it did contemplate that the payment obligation would arise at a fixed date no later than thirty days prior to the expiration of the lease. In the absence of an invoice from CenterPoint, the obligation to make payment would have arisen within the post-order, pre-rejection period.
. ''Claim'
. In re Child. World,
. I do not perceive a "syntactical ambiguity'
Dissenting Opinion
dissenting:
I.
This appeal requires us to determine when a leasehold obligation “arises” for purposes of § 365(d)(3) of the Bankruptcy Code. The majority holds, in effect, that an obligation that accrues over time does not arise as it accrues, but instead arises at whatever time the parties specify in their lease. Because I believe that the majority’s holding gives an unwarranted preference to landlords for recovery of “pre-petition” debts, I respectfully dissent.
II.
Section 365(d)(3) provides, in pertinent part, that:
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.
11 U.S.C. § 365(d)(1). The plain import of this provision is that the trustee must fulfill all obligations under the lease which “arise” from the date of the order until the date of assumption or rejection.
The majority’s holding is predicated on its view that the “fundamental tenet” of § 365(d)(3) is that “it is the terms of the lease that determine the obligation and when it arose”. Supra at 209. While I agree that the terms of the lease determine the obligation, the statute says nothing about how to determine when the obligation arises. Nothing in the text is incоnsistent with the common-sense view that when an obligation arises may be fixed by its intrinsic nature and/or by the extrinsic circumstances of its accrual. An obligation attributable to a particular time may well be said to “arise” at that time, and an obligation that accrues over time may be said to “arise” as it accrues, without doing violence to the statutory language.
I believe that the true “fundamental tenet” of § 365(d)(3) is that landlords, like other post-petition creditors, should receive full and timely payment for post-petition services. This is in keeping with the policy of thе Bankruptcy Code of giving priority to post-petition claims to enable the debtor to keep operating for as long as its current revenues cover current costs (so that the debtor’s business is yielding a net economic benefit). See In re Handy Andy Home Improvement Centers, Inc.,
Our decision today creates a split of authority among the Courts of Appeals concerning priority of back taxes that are billed post-petition, as it is squarely in conflict with the Seventh Circuit’s well-reasoned decision in Handy Andy. As Chief Judge Posner explained:
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*214 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,
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.,
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).,
The proration approach is in keeping with what had been, prior to enactment of § 365(d)(3), the well-established rule. See, e.g., Child World,
Although, as the majority suggests, Congress clearly intended to change prior practice when it enacted § 365(d)(3), I can find no indication of a specific intent to displace proration with the billing date approach. Rather, it seems clear that thе statute was aimed at providing landlords with current pay for current services and relieving them from the “actual and necessary” analysis required under § 503(b)(1). Nothing in the text or legislative history suggests that Congress wished to go beyond putting landlords on the same footing with other trade creditors by allowing them through the timing of their billing to transform pre-petition claims into post-petition claims. See Handy Andy,
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 obligаtions ... 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.
. See generally 2 Norton Bank. L. & Prac.2d § 42:8 Nonresidental Real Property Leases under Code § 365(d)(3) (2000 Supp.); Arnold M. Quittner, Executory Contracts and Leases, 805 PLI/Comm 79, 249-53 (April 2000).