Opinion ID: 768223
Heading Depth: 3
Heading Rank: 3

Heading: The Wainer Decision

Text: 30 In Wainer, the lessor consented to release an existing tenant and allow the assumption and assignment of the lease to a new tenant. Subsequently, the lessor filed suit against the debtor's guarantor after the lease assignee filed bankruptcy and rejected the lease. We ruled that the lessor had novated the lease by consenting to the assumption and assignment, thereby waiving its right to require a guarantee of the assignee's obligations. 984 F.2d at 685. Thus, a landlord, who would otherwise be free to pursue a guarantor if the lease is rejected, cannot pursue a guarantor if the lease is assumed. This stems from the fact that, in accordance with 365(b), the lease is brought back into compliance with its terms, and the other party to the lease is compensated for any interim pecuniary loss. See COLLIER ON BANKRUPTCY 365.05[3]. The end result is that there is no default to prompt liability against the guarantor. 31 Although our analysis in Wainer continued on from this point to determine the validity of the novation, it is only the Court's treatment of 365 that is of relevance to the case at bar. In this key portion of our discussion, we noted the only instance in which the Bankruptcy Code speaks of a claim arising from an unexpired lease or executory contract -- when the contract or lease has been rejected: 32 A claim arising from the rejection, under section 365 of this title ... of an executory contract or unexpired lease of the debtor that has not been assumed shall be determined, and shall be allowed under subsection (a), (b) or (c) of this section or disallowed under subsection (d) or (e) of this section . . . . 33 Wainer, 984 F.2d at 684 (quoting 11 U.S.C. 502(g) (1994) (discussing post-petition debts))(emphasis added.). In addition, we noted that section 365(g) explains that the rejection of an unexpired lease constitutes a breach of the lease, giving rise to a claim. See 11 U.S.C. 365(g) (1994). 34 In light of the absence of any reference to a claim arising from the assumption of a contract and the express cure provisions for dealing with existing defaults, we concluded that under the Bankruptcy Code, a lease that has been assumed under a plan or pursuant to section 365 does not give rise to a claim. Wainer, 984 F.2d at 684 (emphasis in original). The fact that the lease in question was both assumed and assigned was not dispositive to our conclusion on the discharge issue. See id. at 684-85 ([the debtor] did not reject the Lease and, thus, no claim arose in its bankruptcy proceedings to bring about a debt which may have been discharged.). 35 Despite these plain statements, National Gypsum points to a single sentence in which we stated when a lease is assumed and assigned to a third party pursuant to section 365 . . . it does not discharge a debt. Id. at 684. This is a correct statement of our conclusion in that case in which the lease at issue was assumed and assigned. There was no emphasis placed on assigned in this lone sentence from which to conclude that the assignment was critical to the no discharge conclusion. In sum, the court affirmed that a claim arises only from the rejection of an unexpired lease or executory contract, not from the assumption of such a lease or contract. 8 36 If the language we employed in Wainer was inexact, even a cursory examination of the supporting case citations and subsequent case law dispels any confusion over the issue. In Wainer, we made favorable reference to Federal's, Inc. v. Edmonton Inv. Co., 555 F.2d 577, 581 (6th Cir. 1977). In Edmonton, also a case dealing with an assumption and assignment scenario, our sister court explained that a default does not give rise to a dischargeable claim: 37 [There are] two specific events that may give rise to a provable claim under the lease, even though the lease was not rejected. These events are an automatic termination of the lease or an actual breach and subsequent termination by the landlord, occurring either contemporaneously with or prior to the commencement of the proceedings. Neither of those events occurred in the present case. Thus, the default of the assignee alone did not give Edmonton a provable claim against Federal's, and such default failed to alter the character of the executory contract between Edmonton and Federal's. 38 555 F.2d at 581 (emphasis added)(footnote omitted). 39 Similarly in In re Marple Publ'g Co., 20 B.R. 933, 935 (Bankr. E.D. Pa. 1982), the bankruptcy court denied a complaint seeking an order compelling the debtor to cure an existing default on a lease by payment of pre-petition rent. In explaining the effects of assumption under 365, the Court explained: 40 . . . if an unexpired lease is assumed by a debtor in possession under the Code, and such action is approved by the court, such assumption creates a new administrative obligation of the estate which is payable as a first priority . . . . Equally important is the fact that such assumed obligation is a postpetition debt that is not discharged by a confirmation of a chapter 11 case, and it therefore continues to be an obligation of the reorganized debtor. 41 Marple Publ'g, 20 B.R. at 934 (emphasis added)(footnote omitted). 42 National Gypsum's argument that the no discharge conclusion in Wainer hinged upon the assignment of the lease is unpersuasive; it is unsupported by the plain language of the Bankruptcy Code and circuit precedent. In addition, National Gypsum's position is contrary to other supporting authority not cited in our earlier opinion. Specifically, our conclusion today is in accord with that reached by the Fourth Circuit. In the seminal case Consolidated Gas Elec. Light & Power Co. v. United Ry. & Elec. Co., 85 F.2d 799 (4th Cir. 1936), our sister court addressed the issue of whether an executory contract, neither assumed nor rejected, remains enforceable. The Fourth Circuit rebuffed the argument that a party to an un-rejected executory contract had a definite interest and, consequently, had a claim against the debtor, occupying the role of a creditor with all its attendant duties. See Consolidated Gas, 85 F.2d at 804. Instead, the court held that a claim under an executory contract does not arise within the meaning of the Bankruptcy Act until the contract has been rejected. See id. The court reasoned: 43 The party to an executory contract would find it difficult to state a claim under the contract before it had been broken; and certainly neither the debtor nor the trustee could set out the amount of such a claim as required by an order of court directing the filing of schedules ... and the holder of a contract would have a like difficulty in complying with the customary order of the judge with reference to the filing of claims by creditors[.] 44 Consolidated Gas, 85 F.2d at 805; see also Hotz v. Fed. Reserve Bank of Kansas City, 108 F.2d 216, 219 (8th Cir. 1939); In reDeVlieg, Inc., No. 93-C-20104, 1993 WL 248205, at  (N.D. Ill. July 6, 1993). 45 Finally, it should be noted that implementation of National Gypsum's theory would strip 365(g) of any operational effect by eviscerating the protections it offers non-debtor parties. In this case, National Gypsum attempts to turn what is a shield for the non-debtor party into a sword for the debtor. This is not the intent of the Bankruptcy Code. The contention that a pre-confirmation claim, subject to discharge, was created by arrearage on the contract is incompatible with the language of 365 which specifically contemplates such instances when it requires the debtor to cure any default. Section 365(b)(1) provides a guarantee to the non-debtor party, who may be forced to continue a relationship it would rather terminate, that as condition to the forced continuation of the contractual relationship, any losses or defaults existing at the time will be satisfied either through a timely cure or through reasonable assurances of future payment. National Gypsum would undermine this protection by imposing an extra-statutory requirement: that the right to cure must be preemptively protected by the filing of a proof of claim. Failure to make a timely filing of this theoretical claim would preclude the non-debtor from recovery on the amounts owed. In effect, contracts that would otherwise not be beneficial to the estate could become beneficial once the detrimental side of the ledger was wiped clean. This runs contrary to the Code's treatment of non-debtor parties to assumed contracts in which it acknowledges their unusual predicament and accordingly provides protections not offered to ordinary creditors subject to 1141(d) discharge. 9 46 The powers of the debtor in the assumption of contract arena should not be so needlessly aggrandized. Accordingly, we hold that 1141(d) cannot be read to provide for discharge of amounts in default under assumed contracts in a manner that would nullify the cure requirement of section 365(b)(1).