to the facts presented by CenterPoint’s claim, the bankruptcy court held that HA-LO was obligated
under the lease to pay the full month’s rent for November 2001 on the first day of that month, even
though it had rejected the lease by November 2 and had vacated the premises by November 4. The
bankruptcy court also rejected HA-LO’s claim that independent of the language of §365(d)(3), HA-
LO was entitled under the terms of the Lease to make a final rent payment prorated to reflect its partial
occupation during November,

On May 24, 2002, HA-LO appealed, seeking reversal of the Bankruptcy Court’s May 15,
2001 order requiring it to pay CenterPoint an additional $600,311 in rent.

DISCUSSION

There are two questions to be decided on appeal. First, we must determine whether the
bankruptcy court correctly interpreted §365(d)(3). Second, we must decide whether the bankruptcy
court correctly determined that independent of §365(d)(3), the terms of HA-LO’s lease do not support
its prorated payment of rent for November 2001. Before we resolve either of those questions,
however, we must address a dispute over the standard of review.
A. Standard of Review

In reviewing bankruptcy court decisions, the district court applies the same general standards
that govern other appeals in the federal system. We defer to the bankruptcy court’s findings of fact,
reviewing them under the “clearly erroneous” standard. In re Frain, 230 F.3d 1014, 1017 (7" Cir.
2000). Conclusions of law are reviewed de novo. Shelby County State Bank v. Van Diest Supply
Co., 303 F.3d 832, 835 (7" Cir. 2002).

Both parties acknowledge that the bankruptcy court’s interpretation of §365(d)(3) is a legal

4


as bygones—and continue operating as long as the debtor’s business is yielding a net economic benefit.”
Handy Andy, 144 F.3d at 1127. With this core principle of bankruptcy in mind, the Seventh Circuit
construed §365(d)(3) to limit the debtor’s obligations to those arising after a petition is filed.

Handy Andy did not address post-petition rent payable in advance, and the rationale for the
decision cannot be extended to the facts here. The rent payment in dispute is not a sunk cost, but
rather consideration for HA-LO’s right to occupy CenterPoint’s office building following the filing of the
bankruptcy petition. As such, HA-LO’s rent obligation is a current operating cost that must be paid.
See Comdisco, 272 B.R. at 275 (stating that advance rent during the pre-rejection period is “a charge
for the consumption of a resource during the administration of the case,” and explaining the bankruptcy
principle that costs of administration must be paid).

Cc, The Lease

HA-LO argues that regardless of our interpretation of §365(d)(3), the Court should read the
Lease to require the proration of rent in the event.of rejection in bankruptcy. HA-LO acknowledges
that the Lease does not expressly provide for the proration of its rent obligations in this circumstance,
but urges us to consider other provisions in the Lease that contemplate proration during periods of
partial occupancy as evidence that rent should only be paid during periods of actual occupancy before
rejection. The bankruptcy court decided that the Lease did not provide an independent basis for
requiring proration. (R. at 254-256). We agree. As noted above, however, we review the
bankruptcy court’s Lease construction de novo. In accordance with the choice of law provision in the
Lease, we apply Illinois law. See Shelby County State Bank v. Van Diest Supply Co., 303 F.3d

832, 835 (7" Cir, 2002).



rejected, notwithstanding section 503(1) of this.title ...” 11 U.S.C. §365(d)(3). The language of this

section makes clear that from the time that HA-LO filed its bankruptcy petition through November 2,
2001, when its rejection of the CenterPoint Lease took legal effect, HA-LO was obligated to pay rent.
The question is whether §365(d)(3) requires HA-LO to pay the rent for the entire month of November
that was due on November 1.

The bankruptcy court read §365(d)(3) to require HA-LO to pay rent for the entire month of
November. In reaching this conclusion, the court adopted a performance date approach to the debtor-
in-possession’s obligations under the statute. Because the Lease required HA-LO to pay a full month’s
rent prospectively, on the first day of each month, the court ruled that HA-LO’s obligation to pay the
full amount of November rent arose on November 1, 2001, after the order for relief, and one day
before the Lease was rejected. In adopting this performance date approach, the bankruptcy court
followed the reasoning adopted by several other,courts that have addressed this issue. See Jn re
Montgomery Ward Holding Co., 268 F.3d 205 (3 Cir. 2001); Jn re Koenig Sporting Goods, Inc.,

203 F.3d 986 (6" Cir. 2000); Jn re Comdisco, 272 B.R. 671 (Bankr. N.D. Ill. 2002).

HA-LO argues that we should reject the bankruptcy court’s analysis and adopt a proration
approach to §365(d)(3). Relying on the Seventh Circuit’s decision in Jn re Handy Andy Home
Improvement Centers, Inc., 144 F.3d 1125 (7" Cir. 1998), HA-LO urges us to limit its November
rent obligation under §365(d)(3) to a prorated payment for those first two days of November before
the rejection of the Lease took effect. Based on our reading of the language and purpose of
§365(d)(3), we reject HA-LO’s argument and hold that §365(d)(3) required HA-LO to pay

November’s rent when it came due on Nov. 1, 2001.


conclusion subject to de novo review, but they dispute which standard ought to apply to the contract
interpretation issue raised on appeal. CenterPoint urges this Court to treat the bankruptcy court’s
conclusions regarding the meaning of the Lease as findings of fact. It relies on two decisions in which
the Seventh Circuit applied the clearly erroneous standard to review district court interpretations of
ambiguous contract terms. See Platinum Technology, Inc. v. Federal Insurance Co., 282 F.3d 927
(7" Cir. 2002); Central States, Southeast and Southwest Areas Pension Fund v. Kroger Co., 226
F.3d 903 (7" Cir. 2000). But as HA-LO points out, in each of these cases, the Court of Appeals
deferred to the district court’s findings regarding extrinsic evidence offered to prove the meaning of
certain ambiguous terms. Here, the bankruptcy court did not consider extrinsic evidence and made no
conclusions regarding the ambiguity of any of the terms in the Lease. Although the parties dispute the
implications of certain provisions in the Lease, neither party raised an issue of extrinsic or intrinsic
ambiguity in the language of the Lease that would have required the bankruptcy court to engage in fact
finding. Rather, the bankruptcy court decided as.a matter of law that the Lease did not require the
proration of HA-LO’s rent obligation in the final month of the Lease. Thus, we review its construction
de novo.
B. Bankruptcy Code §365(d)(3)

Upon entry of an order for relief in bankruptcy, a debtor-in-possession may “assume or reject
any... unexpired lease of the debtor.” 11 U.S.C. §365(a). Until the rejection or assumption takes
legal effect, the debtor-in-possession must perform its lease obligations. Section 365(d)(3) provides
that “(t]he 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


(emphasis added); see Pacific Atlantic Trading Co. v. Chickering & Gregory, 27 F.3d 401, 403

(9" Cir, 1994) (explaining that prior to passage of §365(d)(3), “[I]essors were entitled to an
administrative priority for occupancy of the premises, but only to the extent allowed under section
503(b)(1), which was an amount equal to the reasonable value of the debtor’s actual use and
occupation of the property”). Our construction of §365(d)(3) furthers its intended purpose, allowing
landlords to collect timely rent payments in the amounts prescribed in the lease.

As the court noted in /n re Comdisco, this construction of §365(d)(3) “risks undermining
bankruptcy reorganizations by imposing costs that are not necessary” and “may often result in windfalls
to the landlord, at the expense of other creditors and stakeholders,” a result that a proration approach
would prevent. But reading a proration requirement into §365(d)(3) would be the same as reading
§503(b)(1)’s “necessary” limitation into it, which would “directly violate the Congressional dictate that
§365(d)(3) be applied in spite of §503(b)(1).” Jn Re Comdisco, 272 B.R. at 675-676. As the court
in Comdsico stated, we must enforce the statute as Congress wrote it. HA-LO was obligated to pay
the full amount of November rent as that obligation arose under the lease on November 1.

We do not agree with HA-LO that the Seventh Circuit’s decision in Handy Andy calls for a
different result. That case dealt with the debtor’s obligation during the post-petition/pre-rejection
period to reimburse the landlord for taxes incurred prior to bankruptcy but billed after the filing of the
petition. The Seventh Circuit heid that regardless of the terms of the lease, taxes billed to the debtor
during bankruptcy must be prorated to exclude obligations accruing before bankruptcy, and that only
taxes attributable to post-petition occupancy are payable under §365(d)(3). The court explained that

“the prioritizing of post-petition debt enables the.debtor (or trustee) to ignore sunk costs—treat bygones


2 ww
fy sin et 0

United States District Court, Northern District of Illinois

Nameofasienestuase | Matthew F. Kennelly _| ‘ting Judge tote
CASE NUMBER 02 C 3967 . DATE 11/20/2002
CASE HA-LO Industries Inc. vs. Centerpoint Properties Trust
TITLE
{In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented. ]
DOCKET ENTRY:
qd) Oo Filed motion of [ use listing in “Motion” box above]
(2) a Brief in support of motion due
(3) a Answer brief to motion due___. Reply to answer brief due.
(4) Oo Ruling/Hearingon__setfor___at
(5) Oo Status hearing[held/continued to] [set for/re-setfor]on___———ssetfor__— at
(6) ira) Pretrial conference[held/continued to] [set for/re-set for]on__—setfor__——sat__—
(7) Oo Trial[set for/re-set for]on__at
(8) Qa [Bench/Jury trial] [Hearing] held/continued to____—_at
(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OFRCP4(m) OC Local Rule 41.1 OOFRCP41(a)(1) [J FRCP4i(a)(2).

(10) | [Other docket entry] Enter Memorandum Opinion and Order: The Court affirms the decision of
the U.S. Bankruptcy Court ordering HA-LO to,pay CenterPoint $600,311 in unpaid rent for the month
of November, 2001. The Clerk is directed to enter judgment affirming the decision of the Bankruptcy
Court.

a1) ff [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

Y | Notices mailed by judge’s staff.

Notified counsel by telephone.

Docketing to mail notices.

17 | Mail AO 450 form.

Copy to judge/magistrate judge. a

11/21/2002

date mailed notice
courtroom

GL deputy’s

GL
initials

Date/time received in -
central Clerk's Office mailing deputy initiats



language reads: “In the event of the termination of this Lease by Landlord ... Landlord is entitled to
recover under any provision of this Lease or at law or equity, including, but not limited to, all Rent
accrued and unpaid for the period up to and including the termination date, as well as all other
additional sums payable by Tenant ...” (R. 46). HA-LO argues, and CenterPoint seems to concede,
that the language “all Rent accrued and unpaid for up to and including the termination date”
contemplates proration of HA-LO’s rent obligation if CenterPoint decided to terminate the lease.
However, HA-LO attributes a significance to this language and to the proration provision in §V.1 that
cannot be supported by the Lease as a whole. The parties could well have agreed to prorate the first
month’s rent, and to allow for the collection of prorated rent as a remedy for the landlord, and yet not
have contemplated proration in all cases where the Lease might end prematurely. Indeed, the fact that
they specifically provided for proration in some instances and not in others indicates that this remedy
should be limited to the particular situations addressed in the Lease. See, e.g., Pritchett v. Asbestos
Claims Management Corp., 332 Ill. App. 3d 890, 897, 773 N.E.2d 1277, 1283 (2002) (noting a
presumption against provisions that easily could have been included in the contract but were not). As
HA-LO reminds us, Illinois law requires this Court to examine the Lease as a whole, “giving effect to
the extent possible, to all contractual provisions.” Bourke v. Dun & Bradstreet Corp., 159 F.3d

1032, 1038 (7 Cir. 1998) (quoting O'Rourke v. Access Health, Inc., 282 Ill. App. 3d 394, 668
N.E.2d 214, 220 (1996)). Yet no principle of contract interpretation requires us to imply terms that the
language of the Lease does not support. Considering the Lease as a whole, we cannot agree with HA-

LO that it provides an independent basis for requiting proration of its November, 2001 rent.

il



The parties dispute the significance of two separate clauses in the Lease that provide for the
proration of rent in certain circumstances. HA-LO argues that language found in §§ V.1 and XX.1
reflects a general policy under the Lease that rent obligations are to be prorated in any month of partial
occupancy. CenterPoint insists that the Lease intentionally provides for proration of rent in only narrow
and specific circumstances.

Section V,1 of the Lease provides: “The Annual Base Rent shall be paid in advance, in twelve
(12) equal monthly installments, commencing on the Commencement Date (prorated for any partial
month) and continuing on the first (1*') day of each month thereafter for the balance of the term of this
Lease...” (R. 28.). HA-LO argues that the phrase “prorated for any partial month” makes clear that
the tenant’s obligation is to pay prorated rent for any partial month during the period that the Lease is in
force. We do not read that phrase so broadly, As the bankruptcy court noted, the “proration”
language in §V.1 is set off by parentheses and is preceded directly by the phrase “commencing on the
Commencement Date.” Notwithstanding the use of the adjective “any,” from which HA-LO draws its
broader interpretation, the proration clause seems to modify the term “Commencement Date.”
Considered in context, the phrase “prorated for any partial month” is most naturally read as addressing
the tenant’s rent obligation in the first month of the Lease.

This determination, however, does not settle matters. HA-LO argues that even if the proration
language in §V.1 applies only to the first month of the Lease, that language still provides evidence of a
policy under the Lease to prorate the tenant’s rent obligations in other circumstances where a month of
partia] occupancy is possible. In support of this theory, HA-LO directs us to §XX.1, which allows for

the payment of prorated rent as damages if the landlord is forced to terminate the Lease. The relevant

10


We begin with the language of §365(d)(3). See Good Samaritan Hosp. v, Shalala, 508 U.S.
402, 409 (1993); In re Estate of Medcare HMO, 998 F.2d 436, 440 (7" Cir. 1993) (“[w]hen
interpreting the Bankruptcy Code, as with any other statute, a court must look first to the statutory
language”). Section 365(d)(3) requires the debtor to “timely perform [its] obligations” under a lease
until the lease is rejected. The plain meaning of this language requires that the debtor fulfill its lease
obligations on time and according to the lease’s.terms until the rejection takes effect. Where, as here, a
lease requires the debtor to pay rent in advance, §365(d)(3) requires the debtor to tender the full rent
payment in advance on the date prescribed in the lease. We agree with the Sixth Circuit that
§365(d)(3) is unambiguous in this regard. See Koenig, 203 F.3d at 989 (holding that where debtor
was obligated under its lease to pay rent in advance on the first of the month, and rejection of the lease
was effective on the second, “§365(d)(3) is unambiguous as to the debtor’s obligation and requires
payment of the full month’s rent”).

This reading of the statutory language is Consistent with evidence of §365(d)(3)’s history and
purpose. Several Courts of Appeals, including the Seventh Circuit, have agreed that §365(d)(3) was
intended to relieve landlords from the burden of proving that the rent payments they sought to collect
from debtors prior to rejection were “actual and necessary” costs of preserving the bankruptcy estate.
See Montgomery Ward, 268 F.3d at 210-211; Koenig, 203 F.3d at 989; Handy Andy, 144 F.3d at
1128; In re Cukierman, 265 F.3d 846, 850-851 (9" Cir, 2001). Indeed, this purpose is evident from
additional language in §365(d)(3) designed to catve out an exception for landlords from the “actual and
necessary” standard of Bankruptcy Code §503(b)(1): the debtor-in-possession “shall timely perform

all the obligations of the debtor ... notwithstanding section 503(b)(1).” 11 U.S.C. 365(d)(3)


amount represented a pro-rata payment of rent for the three day period during which HA-LO planned
to occupy the office building during the month of November. By November 4, 2001, HA-LO had
vacated the premises.”

CenterPoint accepted HA-LO’s check but demanded that HA-LO pay the balance of the rent
for the month of November. When HA-LO refused, CenterPoint filed an administrative rent claim
pursuant to Bankruptcy Code §365(d)(3) and sought an order to compel immediate payment of the
balance of the November rent.

On March 19, 2002, HA-LO’s bankruptcy case was transferred to the United States
Bankruptcy Court for the Northern District of Illinois, along with CenterPoint’s §365(d)(3) claim. In an
order entered on May 15, 2002, the bankruptcy court granted CenterPoint’s claim, and ordered HA-
LO to pay CenterPoint $600,311, representing the amount due through the end of November.

The bankruptcy court’s decision rested, largely, upon its interpretation of $365(d)(3). That
section provides that:

[t]he 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)(3). The bankruptcy court reasoned that the plain language of the statute requires
1
the trustee or (as here) the debtor-in-possession, 11 U.S.C. §1107(a); in re Handy Andy Home
Improvement Centers Inc., 144 F.3d 1125, 1127 (7 Cir. 1998), to satisfy all rent obligations under

a lease “arising ... after the order for relief” as those obligations come due. Applying this interpretation

2 ‘The parties dispute whether HA-LO vacated the premises on November 3 or November 4. This factual
issue was irrelevant to the Bankruptcy Judge’s disposition of CenterPoint’s §365(d)(3) claim, and to our decision on

appeal.


provision for payment of a full month’s rent on the first day of that month. HA-LO has appealed the
bankruptcy court’s order and urges this Court to adopt its “proration approach” to §365(d)(3). For
the reasons set forth below, the Court affirms the bankruptcy court’s decision.
FACTUAL BACKGROUND

HA-LO and CenterPoint were parties to.an Office and Industrial Building Lease dated
November 30, 1998 (“Lease”), pursuant to which CenterPoint leased an office building to HA-LO for
a term of 15 years commencing April 1, 2001. Under the terms of the lease, HA-LO was obligated to
pay rent in the amount of $660,342.17 per month, payable in advance on the first day of each month.
HA-LO moved into the leased premises on April 1, 2001 and remained there through the first few days
of November, 2001.

On July 30, 2001, HA-LO and certain of its subsidiaries filed in the United States Bankruptcy
Court for the District of Delaware voluntary petitions for reorganization under Chapter 11 of the
Bankruptcy Code. Pursuant to §365(a) of the Code, on August 21, 2001, HA-LO sought authority to
reject the Lease, at its option, effective upon 30 days written notice to CenterPoint. On September 6,
2001, the Bankruptcy Court granted that authority.

HA-LO continued to occupy the leased premises under the terms of the lease. However, on
October 3, 2001, HA-LO exercised its option to reject the Lease, and it provided written notice to
CenterPoint declaring its intention to vacate the premises and reject the Lease effective November 2.!

On November 1, 2001, HA-LO tendered a check to CenterPoint in the amount of $60,031.17. This

' HA-LO contends that the rejection of the Lease.was effective on November 3, 2001. In fact, rejection

became effective on November 2, 2001, exactly 30 days after written notice was proffered on October 3, 2001.

2



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

IN RE: )
)

HA-LO INDUSTRIES INC., et al., _)
)

Debtors. )

)

)

)

HA-LO INDUSTRIES INC. )
)

Appellant, )

vs. ) Case No. 02 C 3967

)

CENTERPOINT PROPERTIES TRUST )
)

Appellee. )

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:

The United States Bankruptcy Court ordered HA-LO Industries, Inc. to pay its former
landlord, CenterPoint Properties Trust, $600,311 for rent due under an office building lease between
the parties, the terms of which extended beyond HA-LO’s filing of a voluntary petition for bankruptcy.
The bankruptcy court’s order was based in part on its determination that §365(d)(3) of the Bankruptcy
Code requires a debtor-in-possession that has elected to reject a lease of nonresidential real property
to pay the monthly rent due under that lease as it becomes due, notwithstanding that this may require
the debtor to pay advance rent covering a period after its rejection of the lease takes effect. In the
bankruptcy court, HA-LO objected unsuccessfully to that interpretation, arguing that §365(d)(3) only

requires tenant debtors to pay rent prorated through the date of rejection, in spite of the lease’s VY


CONCLUSION
For the reasons stated above, the Court affirms the decision of the United States Bankruptcy
Court ordering HA-LO to pay CenterPoint $600,311 in unpaid rent for the month of November, 2001.

The Clerk is directed to enter judgment affirming the decision of the Bankruptcy Court.

MATTHEW F. KEWNELLY
Date: November 20, 2002 United States District Judge

12