In Re Travel 2000, Inc.
OPINION AND ORDER GRANTING MOTIONS TO COMPEL PAYMENT OF RENT
This matter comes before the Court on the Motions of Urban Retail Properties (URP) and RAK Old South Associates (RAK) to Compel Payment of Rent pursuant to 11 U.S.C. § 365 of the Bankruptcy Code. This Court has jurisdiction under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(A).
On February 2, 2001, Travel 2000, Inc. (Debtor) filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Since that date it has continued to operate its business and manage its properties as a debtor-in-possession under 11 U.S.C. §§ 1107(a) and 1108.
The Debtor occupied four stores in shopping centers managed by URP 1 and one *446 store in a building managed by RAK. 2 The leases of these stores all provide that rent becomes due on the first of the month for that month.
Pursuant to an Order entered by the Honorable Jeffrey R. Hughes, these leases and several others were rejected
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effective February 28, 2001. The Debtor has not paid post-petition rent for the period of February 2-28, 2001
4
arguing that under
In re Koenig Sporting Goods, Inc.,
11 U.S.C. § 365(d)(3) governs the obligations of a debtor-tenant to its landlord between the time a bankruptcy petition is filed and the time a debtor-tenant аssumes or rejects the lease. The statute provides in pertinent part:
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 Sixth Circuit examined this statute in
In re Koenig Sporting Goods, Inc.,
Under the terms of the lease the debtor was obligated to pay Morse $8,500 in advance on the first of each month for that month’s rent. The specific obligation to pay rent for December 1997 arose on December 1, which was during the postpetition, prerejection period. Under these circumstances, § 365(d)(3) is unambiguous as to the debtor’s rent obligation and requires payment of the full month’s rent.
This interpretation of the statute has come to be known as the “performance date approach.” Under this theory, “any amount coming due under a lease in the postpetition, prerejection period must be paid in full by the debtor without regard to whether the payment pertains to a prepetition or postrejection benefit.”
In re Koenig Sporting Goods, Inc.,
To the contrary, a majority of courts have adopted what is known as the “pro-ration approach.” Under this view, a debtor is required by 11 U.S.C. § 365(d)(3) to pay only those amounts due under a lease that pertain to the benefits realized by the estate during the postpetition, pre-rejection period regardless of when the payment became due. See
Newman v.
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McCrory Corp. (In re McCrory Corp.),
The Honorable Walter Shapero in In the Matter of The½ Off Card Shop, Inc., Case No. 00-48425-WS (Bankr.E.D.Mich. March 7, 2001) took the Sixth Circuit’s analysis in Koenig one step further. In % Off Cards, the rent under the leases was due on the first of each month for that month. The Debtor filed bankruptcy on June 2, 2000 and rejected the leases. The Debtor did not pay the June rent arguing that it was not required to do so under 11 U.S.C. § 365(d)(3). Judge Shapero found that because the obligation did not “arise from [or] after an order for relief,” the landlords held a prepetition claim for the full amount of the June rent.
The Debtor argues that its February rent obligation originated on February 1, 2001. Consequently, it did not fall within the postpetition, prerejection period under 11 U.S.C. § 365(d)(3). Because the Sixth Circuit found the language of the statute unambiguous, the analysis still applies even when the due date for the rent payment falls outsidе of the postpetition, prerejection period. In other words, the statute does not become ambiguous simply because the claim falls outside the period enumerated in the statute. In addition the Debtor argues, Judge Shapero’s ruling in % Off Cards is correct and the landlords have nothing more than a prepetition claim for rent, not an administrative claim and certainly not a claim under § 365(d)(3).
The landlords, on the other hand, posit that Koenig- only applies when the claim arises in the postpetition, prerejection period. Accordingly, this Court is not bound by the Sixth Circuit’s conclusion that 11 U.S.C. § 365(d)(3) is unambiguous. Therefore the door is open to further analysis and even the conclusion that the pro-ration approach is the approрriate means to classify the landlords’ claims.
In pertinent part, 11 U.S.C. § 365(d)(3) states that a trustee shall timely perform all the obligations of the debtor, except those specified in § 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 § 503(b)(1). The issue rаised under the present motion is whether the Debtor’s obligation to the Lessor “arose” before the entry of the order for relief and whether it was an “obligation of the debtor ... arising from or after the order of relief’ within the meaning of the section.
First, we think it helpful to revisit In re
Koenig Sporting Goods, Inc.,
Since Congress was no doubt well aware that rental is usually paid monthly in advance, it is not really possible to reconcile § 365(d)(3) with according the Debtor the option not to pay its monthly rent when due, even though payment would impinge tо some extent upon normal bankruptcy principles and priorities ... Whether this same conclusion would follow if the Court were faced with the issue of awarding the landlord a year’s *448 rental for two days occupancy, in the unlikely event rent was payable yearly in advance, is an open question. Logic would demand the same result, but the laсk of precision and clarity in the language of § 365(d)(3) may indicate that Congress intended the courts to exercise some discretion where an inflexible approach to § 365 would severely distort fundamental bankruptcy principles.
Id. at 741.
When addressing the same issue in
In re Koenig Sporting Goods, Inc.,
On appeal, the Sixth Circuit found that the debtor in Koenig was obligated under the terms of the lease to pay rent in advance and that the obligation arose during the post-petition, pre-rejеction period. The Sixth Circuit specifically stated that “under these circumstances” the statute is unambiguous and requires payment of a full month’s rent.
“[A] court should not resolve questions of statutory interpretation so that a particular Bankruptcy Code section conflicts and disturbs the overall purpose and. function of the Code.”
In re R.H. Macy & Co.,
A Bankruptcy Code fundаmental specifically relating to Chapter 11, is the allowance of priority status to post-petition claims so that the debtor can keep doing business so long as current revenues cover current costs of operation. This is relevant to any borrowing, trade or other transactions in which the debtor engages after filing bankruptcy.
Thе remarks of Senator Orrin Hatch in the legislative history of 11 U.S.C. § 365(d)(3) support this principle in the context of the landlord/debtor relationship. He states:
[T]he landlord is forced to provide current services — the use of his property, utilities, security, and other services without current payments. No other creditor is put in this position ... 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 requirement will insure that debtor-tenants pay their rent, common area charges, and other charges on time pending the trustee’s assumption or rejectiоn of the lease.
130 Cong.Ree. S8887, S8994-95 (daily ed. June 29, 1984).
Had a trade creditor of Travel 2000 sent a bill for goods on the first of the month, with the goods arriving on the third; when Travel 2000 filed bankruptcy on the second *449 the creditor would have the option of awaiting payment or demanding return of the goods. The creditor would not be required to both forfeit the goods and the payment. If the trade сreditor decided to continue dealing with the debtor post-petition, it would do so voluntarily and thus knowingly assume the risk of not being fully compensated. The landlord, on the other hand, is forced, involuntarily, to deal with the debtor/tenant until the debtor rejects the lease. Under the performance date approach of § 365(d)(3), the landlord would not be paid. We believe this result constitutes an iniquitous application of the Bankruptcy Code. It may also be a step toward violating the involuntary servitude prohibition of the Thirteenth Amendment 5 to the United States Constitution.
“While the general spirit of the phrase ‘involuntary servitude’ is easily comprehended, the exact range of conditions it prohibits is harder to define.”
United States v. Kozminski,
There havе been limited cases addressing whether a corporation has rights under the Thirteenth Amendment. See
United States v. Tivian Laboratories, Inc,,
There is sparse аuthority discussing the relationship between the Thirteenth Amendment and the provisions of the Bankruptcy Code. Congress was not unaware that the prohibition against involuntary servitude loomed in bankruptcy, and therefore concentrated its concern primarily on the area of involuntary chapter 13 petitions. 11 U.S.C. § 303(a). Consequently, the few cases that analyze the Thirteenth Amendment’s relevance to bankruptcy law do so in this context.
In
Flood v. Kuhn,
No other case has broached the subject of involuntary servitude in the context of a creditor-landlord providing services involuntarily without compensation.
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The closest example we found was in
Commercial Bank v. Price (In re Notchcliff Associates),
Although we do not have to determine the lurking constitutional question at this juncture, we do see certain similarities between a victim forced to work involuntarily for no pay and the position of a landlord, forced to involuntarily provide services for a debtor, and remaining unpaid under the performance date approach of § 365(d)(3).
When applying 11 U.S.C. § 365(d)(3) to the circumstanсes of the case before us, ambiguity emanates from the words “arises” and “obligation.” An “obligation” can “arise” when it comes due and payable or when it accrues.
In the Matter of Handy Andy Home Improvement Centers, Inc.,
If obligation were interpreted to refer to the entire amount that matures and becоmes payable on a given date, without regard to whether any part of the amount accrued prepetition, then § 365(d)(3) would conflict with, and constitute an exception to the provisions governing claims. Section 365(d)(3) expressly indicates that it is meant to constitute an exception to the provisions of the Code governing administrative еxpenses, which are strictly postpetition in nature, but it does not state that it is meant to constitute an exception to the provisions governing claims.
Therefore, even though the landlords’ claims arose prepetition, the obligations of both the landlords and the Debtor arose post-petition. Consequently, we find that the rent due falls under thе purview of § 365(d)(3). We also find that the landlords are to be paid on a prorata basis.
These conclusions are supported by the limited legislative history available regarding this statute. In
Newman v. McCrory Corp. (In re McCrory Corp.),
Also agreeing with these conclusions is a Sixth Circuit case which looks at a similar issue under 11 U.S.C. § 502(b)(6)(B). In
Vause v. Capital Poly Bag, Inc. (In re Vause),
These conclusions are also consistent with the practice of the bankruptcy courts prior to the enactment of § 365(d)(3). Before 1984, courts applied the рroration approach under 11 U.S.C. § 503(b)(1) to “allow as an administrative expense the full amount of the rent, as long as it was not clearly unreasonable, prorated over the postpetition, prerejection period.”
Child
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World, Inc. v. Campbell/Massachusetts Trust (In re Child World, Inc.),
The United States Supreme Court has also held that it “would not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.”
Cohen v. de la Cruz,
Consequently, we find that Travel 2000’s responsibility to pay rent crystаllized on the first of the month thereby giving rise to the landlords’ claims. However, the Debtor’s obligation arose each day in the month of February until it vacated the premises and the landlords were free to re-lease the space. The Debtor wanted the continued occupancy of the leased property to conduct its going-out-of-business sales. To get this benefit it should be required to pay the full rent under the lease for every day that it continued to occupy the property after the bankruptcy filing.
ORDER GRANTING MOTION OF URBAN RETAIL PROPERTIES AND RAK OLD SOUTH ASSOCIATES TO COMPEL PAYMENT OF RENT
NOW, THEREFORE, IT IS HEREBY ORDERED that for the reasons stated in the attached opinion, the Motion of Urban Retail Properties to Compel Payment of Rent is GRANTED.
IT IS FURTHER ORDERED that copies of this Opinion and Order shall be served by first-class United States mail, postage prepaid, upon Harold E. Nelson, Esq., Ian I. Allen, Esq., Robert E.L. Wright, Esq., Mary Kay Stacey, Esq., Jonathan D. Yellin, Esq., Eric J. Haber, Esq. and Daniel M. Katlein, Esq.
Notes
. Genesee Valley Mall, Monmouth Mall, Manhattan Mall and Shops at the Mart
. 296 Washington Street, Boston, Massachusetts
. In all, 43 leases were rejected.
.The rent due for the month of Februaiy is as follows: Genesee Valley Mall — $5,753.09; Monmouth Mall — $4,996.34; Manhattan Mall — $16,589.04; Shops at the Mаrt— $2,732.28; 296 Washington Street— $9,678.43.
. The Thirteenth Amendment specifically provides:
Section 1. Neither slavery nor involuntary servitude, except as punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.
. By way of reminder, we are referring only to the rent obligation from February 2-28, 2001 known as "stub” rent. On information and belief, the Debtor has been diligently paying its post-petition rent, starting March 1, 2001 during the pendency of its Chapter 11.