Opinion ID: 1938746
Heading Depth: 2
Heading Rank: 4

Heading: Holle's Claim for Post-Petition Rent

Text: We turn lastly to the cross-appeal. As discussed previously, in 1972 Doctors' Hospital, Inc., then lessee of the New Hampshire Avenue property, assigned its leasehold to WMC. From that time forward, WMC stood on both sides of the rental transaction, acting as landlord in its capacity as managing general partner of MHEC, and as tenant in its own behalf. WMC credited MHEC for the monthly rent and debited its own accounts until September 19, 1979, when it filed its petition in bankruptcy, after which these payments ceased. On his cross-appeal, Holle challenges the trial court's denial of his claim for rent accruing between the time WMC filed its bankruptcy petition and the time it sold the building. Judge Kessler apparently concluded that the debt for rent during this period was discharged by approval of the Plan of Arrangement by the bankruptcy court. [32] She declined to revisit the legal and factual questions raised in WMC's bankruptcy as this would contravene the fresh start policy represented by a discharge in bankruptcy. Holle contends that the court failed to recognize that the rental obligation came within an exception to the discharge rule for debts undisclosed by the debtor. WMC counters that the exception is inapplicable because WMC disclosed its rental obligation in filings before the bankruptcy court, and rejected the lease pursuant to 11 U.S.C. § 365. In any event, WMC contends, the Superior Court lacked jurisdiction to determine the dischargeability of the debt.
Under ordinary circumstances, confirmation of a plan of arrangement by the bankruptcy court in a chapter 11 case discharges the debtor from any debt that arose before the date of such confirmation. Id. § 1141(d)(1)(A). In addition, it discharges the debtor from a claim arising from rejection, ... of an executory contract or unexpired lease of the debtor that has not been assumed.... Id. §§ 1141(d)(1)(A), 502(g). Despite the broad sweep of a discharge in bankruptcy, eight classes of debts are excluded from its operation. See 11 U.S.C. § 35(a) (1976), [33] currently codified as amended at 11 U.S.C. § 523(a) (1988); George Washington Univ. v. Galdi, 475 A.2d 1130, 1133 (D.C.1984). Prior to 1970, once the bankruptcy court determined that the debtor was entitled to a discharge, issues of nondischargeability arising under § 35(a) typically were decided by state courts in the context of a creditor's action to enforce a prior judgment. Brown v. Felsen, 442 U.S. 127, 130, 99 S.Ct. 2205, 2208, 60 L.Ed.2d 767 (1979). In 1970, Congress amended the Act to add section 35(c), which vests exclusive jurisdiction in United States bankruptcy courts to determine whether a debt fell within three of those eight categories: liabilities for obtaining money by false pretenses or false representations, § 35(a)(2); claims arising from fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity, § 35(a)(4); and liabilities for willful and malicious injuries to the person or property of another, § 35(a)(8). Pub.L. No. 91-467, § 7, 84 Stat. 992, codified at 11 U.S.C. § 35(e) (1976), currently codified as amended at 11 U.S.C. § 523(c) (1988). Section 35(c) reflects a congressional determination that the bankruptcy court have exclusive jurisdiction over certain types of nondischargeability questions and concurrent jurisdiction with nonbankruptcy courts over others. In re Borbridge, 81 B.R. 332, 334 (Bankr.E.D.Pa.1988). Here, Holle invokes § 35(a)(3), which provides: (a) A discharge in bankruptcy shall release a bankrupt from all his provable debts, whether allowable in full or in part, except such as (3) have not been duly scheduled in time for proof and allowance, with the name of the creditor if known to the bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy[.] In contrast to the types of debts described above, the determination of dischargeability under this section is of the type over which the bankruptcy court has concurrent but not exclusive jurisdiction. In re McNeil, 13 B.R. 743, 747 (Bankr.S.D.N.Y. 1981) (emphasis added). The cases WMC cites are not to the contrary. [34] We conclude that a state court may determine dischargeability in a creditor's action on the debt when the nondischargeability claim rests on the debtor's failure to disclose a debt under 11 U.S.C. § 35(a)(3), and that the trial court therefore erred in concluding that Holle's claim was foreclosed by the discharge in bankruptcy. In re Coppi, 75 B.R. 81, 82 (Bankr.S.D.Iowa 1987). See also George Washington Univ. v. Galdi, supra, 475 A.2d at 1133; In re Barber Indus., 30 B.R. 382, 384 (Bankr.M.D.Fla. 1983).
WMC next contends that it had no duty to remit rent to MHEC because it rejected the lease in the chapter 11 proceeding. As noted earlier, a discharge in bankruptcy, in addition to absolving the debtor of liability for debts arising prior to the time the petition is filed, can also relieve him of continuing obligations under executory contracts and unexpired leases. In order to ease the burdens of continuing performance under onerous contracts and leases that may deplete the resources of the estate, see In re Lovitt, 757 F.2d 1035, 1041 (9th Cir.), cert. denied, 474 U.S. 849, 106 S.Ct. 145, 88 L.Ed.2d 120 (1985), the Bankruptcy Act authorizes a debtor-in-possession in a chapter 11 case, under the supervision of the court, to decide whether to assume or reject such leases. 11 U.S.C. § 713(1) (rejection with permission of the court); id. § 757(2) (rejection in plan of arrangement); Texas Importing Co. v. Banco Popular de Puerto Rico, 360 F.2d 582, 583-84 (5th Cir.1966). An election to reject a lease is treated as an anticipatory breach, and obligations thereunder, although continuing in nature, are treated as debts arising before the petition in bankruptcy. 11 U.S.C. § 103(c); In re Miracle Mart, 278 F.Supp. 861, 863 (S.D.N. Y.), aff'd, 396 F.2d 62 (2d Cir.1968). If a contract or unexpired lease is rejected, the lessor assumes the status of a pre-petition creditor. Id.; 11 U.S.C. § 753. During the period between the filing of the petition and the debtor's decision to reject or affirm, however, the lessor occupies an equivocal position. Until his contract is rejected, he is not a creditor with a provable claim.... In re Greenpoint Metallic Bed Co., 113 F.2d 881, 884 (2d Cir.1940). In a reorganization case, as opposed to a liquidation case, there is no fixed time within which the debtor/trustee must make the election. [35] A lessor wishing to bring an end to this potentially prolonged period of uncertainty has a right to petition the court to act, either by requiring assumption or rejection of the lease in the plan of arrangement, 11 U.S.C. § 757(2), or by ordering it rejected, id. § 713(1). See Federal's, Inc. v. Edmonton Inv., 555 F.2d 577, 582 (6th Cir.1977) (citation omitted); In re Greenpoint Metallic Bed, supra, 113 F.2d at 884. Yet this right would mean little if the lessor was unaware of his status in the bankruptcy proceeding. Thus, the Bankruptcy Rules oblige the debtor to list, in addition to schedules of all his debts, all executory contracts including unexpired leases. Bankr.R. 11-11 (1976). See also 11 U.S.C. § 724 (debtor must list all executory contracts at time petition is filed). Both methods of rejection  by permission of the court or by inclusion in the plan of arrangement  naturally depend on the debtor's disclosure of the lease's existence and the identity of the lessor. The Act provides that the court in a chapter 11 proceeding may permit the debtor to reject executory contracts only upon notice to the other parties to such contracts. 11 U.S.C. § 713(1); Bankr.R. 11-53 (notice and hearing required). Notice of rejection is also required to parties whose contracts are rejected in the plan of arrangement. In re Alfar Dairy, 458 F.2d 1258, 1261 (5th Cir.), cert. denied, 409 U.S. 1048, 93 S.Ct. 517, 34 L.Ed.2d 501 (1972); Bankr.R. 11-24(a)(5) (10 day notice to all parties in interest required prior to confirmation of the plan). [36] Here, it is beyond dispute that WMC did not list the lease assignment under which it acted as lessee of the New Hampshire Avenue property since 1972 in its statement of executory contracts and unexpired leases. [37] Consequently, its confirmed Plan of Arrangement did not include that lease among its list of rejected contracts. Nor did the court ever permit WMC, after notice and hearing to MHEC, to reject the lease prior to confirmation of the plan. The effect of WMC's failure to affirmatively reject the lease in either of the two ways provided under the Act was that it continued in force. In re Innkeepers, supra note 36, 671 F.2d at 226; Federal's, Inc., supra, 555 F.2d at 579; In re Alfar, supra, 458 F.2d at 1261-62. A discharge in bankruptcy does not affect an unrejected lease. Federal's, Inc., supra, 555 F.2d at 579-80.
To overcome Holle's argument that the debt was not discharged because WMC failed to disclose it, WMC contends that it listed its obligation as lessee under the assignment in its schedule of debts, and that, even if it was somehow deficient in that regard, Holle had actual notice of the bankruptcy proceedings. See 11 U.S.C. § 35(a)(3). WMC proffers what can only be characterized as enigmatic references in certain schedules of debts accompanying its petition, and other documents showing that Holle was at least constructively aware of the lease assignment in time to file proof of a claim prior to confirmation. As regards the references in the schedules, we note that they are inherently ambiguous as to whether WMC was obliged to pay rent to MHEC in its capacity as lessor's agent holding rent on behalf of the partnership or rather, as prime tenant, [38] and that they respond to the request on the form on which they appear for prepetition rental obligations. Continuing obligations under an unexpired lease, as discussed above, are treated differently under the Act. Both the statute, 11 U.S.C. § 724, and Bankr.R. 11-11 unequivocally require the debtor to list executory contracts on an appropriate form. Because a lessor does not become a creditor with a provable claim until the lease is rejected in the manner specified in the Act  and only then has an opportunity to participate in the proceeding as a creditor  it is not unreasonable to demand strict compliance with requirements designed to put such lessors on notice of the need to do what is necessary to be deemed a creditor. In these circumstances, as the court in In re Alfar Dairy noted in an analogous context, [i]nformal, ad hoc compliance with the general contours of the Act is not sufficient. 458 F.2d at 1261. As WMC points out, there is an exception to nondischargeability of undisclosed debts when the creditor has notice or actual knowledge of the proceedings in bankruptcy, and Holle does not dispute that he, at least, had actual knowledge of WMC's petition the day after it was filed. 11 U.S.C. § 35(a)(3). This exception reflects the due process underpinnings of section 35(a)(3). It recognizes that a discharge in bankruptcy is a property deprivation accomplished through the offices of the court, but that a creditor's actual knowledge of the commencement of bankruptcy proceedings affords him sufficient notice of the need to participate in those proceedings in order to protect his interest. The exception, however, does not address the due process problem that arises when a discharge extinguishes the property interest of a creditor having no notice that he has an interest. While Holle had notice of the proceedings, and moved to vindicate other interests in need of protection, because of the unusual circumstances of this case  where WMC maintained all partnership books and records, acted as both tenant and agent for the landlord, and paid the rent by means of paper transfers between itself and the partnership  Holle was unaware of WMC's status as prime tenant, and of the need to force rejection of the lease in order to claim the status of a creditor. [39] As the United States Supreme Court held in rejecting the argument that knowledge of the bankruptcy proceeding put a lienholder on notice of the deadline for filing its proof of claim: The argument is that such knowledge puts a duty on creditors to inquire for themselves about possible court orders limiting the time for filing claims. But even creditors who have knowledge of a reorganization have a right to assume that the statutory reasonable notice will be given to them before their claims are forever barred ... [A] reasonable opportunity to be heard must precede judicial denial of a party's claimed rights. New York v. N.Y., N.H. & H.R. Co., 344 U.S. 293, 297, 73 S.Ct. 299, 301, 97 L.Ed. 333 (1953). Observance of the provisions of the Act and Rules requiring disclosure of unexpired leases, in the circumstances of this case, would have put Holle and the MHEC partners on notice of the very existence of a claim against WMC, and afforded them the reasonable opportunity to be heard that must precede extinction of those rights. Strict compliance with notice provisions is central to the reorganization scheme: [t]he importance of creditor participation in reorganization proceedings ... coupled with the practical dangers to substantive creditor rights posed by the lack of such participation, will admit of no other conclusion. In re Intaco Puerto Rico, 494 F.2d 94, 99 (1st Cir.1974) (citation omitted). In evaluating WMC's citations, we do not believe that the references to a sublease upon which it relies can substitute for the fair notice to Holle or any of the MHEC partners of WMC's status as prime tenant under the lease which the Act contemplates. In sum, we conclude that the post-petition, pre-sale lease obligation was not discharged in bankruptcy because WMC failed to list the assignment as an unexpired lease and failed to reject it in accordance with the provisions of the Act. We accordingly remand the cross-appellants' claim for rent to the trial court for a determination of damages.