Opinion ID: 714128
Heading Depth: 3
Heading Rank: 3

Heading: Practice Under the Bankruptcy Act

Text: 39 Were we writing on a clean slate, we might perhaps be persuaded by the district court's analysis--though, as we have discussed above, we think that the structure of the Code favors the landlord's position. We are not, however, permitted to start from scratch. In Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), the Supreme Court declined to resolve de novo an ambiguous interrelationship between certain Bankruptcy Code provisions, where accepted pre-Code bankruptcy practice existed. The Court stated: 40 When Congress amends the bankruptcy laws, it does not write on a clean slate. ... Furthermore, this Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a change in pre-Code practice that is not the subject of at least some discussion in the legislative history. 41 502 U.S. at 419, 112 S.Ct. at 779 (citation omitted). 42 In the case before us, an ambiguity arguably exists as to whether claims arising from the rejection of assumed contracts by definition meet the actual and necessary requirements of § 503(b)(1)(A) and hence automatically enjoy administrative expense priority under § 507(a)(1). See In re Jartran, Inc., 886 F.2d 859, 868-69 n. 11 (7th Cir.1989) (stating that the current provisions of the Code are not entirely clear as to whether creditors are entitled to administrative expense priority for executory contracts or leases that are assumed before conversion from reorganization to liquidation proceedings). Nostas and amicus argue, however, that the pre-Code practice was to grant administrative status automatically to all claims arising from the subsequent rejection of an assumed executory contract--and, therefore, that any ambiguity must be resolved in favor of granting administrative expense status. 43 Nostas points out in its reply brief that the relevant sections of the former Bankruptcy Act provided that [w]hen a contract entered into or assumed in a superseded proceeding is rejected, the resulting liability should constitute a cost of administration of the superseded proceeding. Bankruptcy Act §§ 238(b), 378(b), 483(b) (emphasis added); see also Chugiak Boat Works, 18 B.R. at 295 n. 5. In this context, the resulting liability would be the landlord's damages for future rent and, arguably, for related costs such as legal and brokerage fees. This conclusion is supported by the legislative history of the foregoing language of the Bankruptcy Act, which was well described by the bankruptcy court in Chugiak Boat Works: 44 In 1967, Congress amended Chapters X, XI, and XII of the Bankruptcy Act of 1898 to sanction the result that had been reached by the Courts under the administrative expense provisions of the Act. The amendment explicitly provided that any executory contract entered into or assumed during the reorganization proceeding but rejected after the conversion to straight bankruptcy constituted an administrative expense of the reorganization proceeding. The legislative history indicates that the amendment was intended to resolve confusion over how such executory contracts should be treated and to recognize the rights of those parties who have dealt with an officer of the court in the debtor relief proceeding. Senate Report No. 90-749, 90th Cong. 1st Sess. (1967), [1967 U.S.C.A.A.N. at] 2002, 2005. Thus, pursuant to the 1967 amendment, all executory contracts originally entered into during the reorganization as well as all executory contracts assumed during that time were automatically granted administrative expense priority. 45 18 B.R. at 295 (footnote omitted). 46 Moreover, even before Congress added this clarificatory language to the Bankruptcy Act, it was well-established in this Circuit that administrative priority was available either if the trustee assumed an executory contract or if the estate received demonstrable benefits under the contract. American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119, 124 (2d Cir.1960) (Lumbard, C.J.) (The claim of a creditor having an executory contract with the debtor at the time the debtor's petition is filed is entitled to priority under these provisions only if the trustee or debtor in possession elects to assume the contract or if he receives benefits under it.) (emphasis added); see also 2 COLLIER ON BANKRUPTCY p 365.01, at 365-20 (explaining that under § 70b of the Bankruptcy Act, which preceded § 365, the price of securing continued mutuality upon assumption of an executory contract was nothing short of complete mutuality, that is, assumption by the estate of the bankrupt's liabilities, not as a matter of granting a distributive share, but by performance in full, just as if bankruptcy had not intervened). 47 Absent a clear Code directive, or legislative history that directly addresses the issue and reaches a contrary result, the rule of construction set forth in Dewsnup dictates that Nostas's claim for post-rejection rental damages should be governed by Bankruptcy Act practice. See Dewsnup, 502 U.S. at 419, 112 S.Ct. at 779. That practice strongly supports the conclusion that Nostas's claim was entitled to administrative expense status. This result, moreover, agrees with our earlier analysis that the Code's timing provisions, together with the rules governing benefit, indicate that all future rent accruing under an assumed lease is entitled to the status of an administrative expense. Accordingly, we so hold. 48