Opinion ID: 196348
Heading Depth: 2
Heading Rank: 2

Heading: When Is A Rejection Effective?

Text: B. When Is A Rejection Effective? 8 The best hope for capturing congressional intent is by focusing on the language purposefully deployed by the legislature. Thus, a statute ordinarily will be construed according to its plain meaning. See Estate of Cowart v. Nicklos Drilling Co., 112 S. Ct. 2589, 2594 (1992); In re Jarvis, 53 F.3d at 419; Pritzker v. Yari, 42 F.3d 53, 67-68 (1st Cir. 1994), cert. denied, 115 S. Ct. 1959 (1995). But, when Congress' words admit of more than one reasonable interpretation, plain meaning becomes an impossible dream, and an inquiring court must look to the policies, principles and purposes underlying the statute in order to construe it. See Pritzker, 42 F.3d at 67; see also Sullivan v. CIA, 992 F.2d 1249, 1252 (1st Cir. 1993) (explaining that courts may look behind statutory language when the legislature blows an uncertain trumpet). Congress, after all, does not legislate in a vacuum. Here, the protagonists assure us that the statutory language is plain, and that we need not go beyond it. The debtor says that under section 365(a) the rejection of a nonresidential lease plainly becomes effective on the motion filing date (when notice of rejection is given), subject to defeasance in the event a judge later vetoes the trustee's decision. The landlord says that under section 365(a) the rejection of a nonresidential lease plainly cannot become effective until the court approval date (when the bankruptcy court places its imprimatur on the decision). The authorities are divided as to which interpretation of the statutory language is appropriate. Some 9 courts (albeit a minority) believe that section 365(a) should be read, as TMC successfully argued in the district court, to align judicial approval as a condition subsequent to the trustee's independently effective rejection of a nonresidential lease. See, e.g., In re Joseph C. Spiess Co., 145 B.R. 597, 604 (Bankr. N.D. Ill. 1992); In re 1 Potato 2, Inc., 58 B.R. 752, 755-56 (Bankr. D. Minn. 1986). Other courts (more numerous, overall) believe, as Mellon successfully argued in the bankruptcy court, that section 365(a) should be read to require judicial approval as a condition precedent to an effective rejection of a nonresidential lease. See, e.g., In re Paul Harris Stores, Inc., 148 B.R. 307, 309 (S.D. Ind. 1992); In re Federated Dept. Stores, Inc., 131 B.R. 808, 815-816 (S.D. Ohio 1991); In re Swiss Hot Dog Co., 72 B.R. 569, 571 (D. Colo. 1987); In re 1 Potato 2, Inc., 182 B.R. 540, 542 (Bankr. D. Minn. 1995); In re Revco Dept. Stores, Inc., 109 B.R 264, 267 (Bankr. N.D. Ohio 1989). No court of appeals has ventured to answer the question.4 In our judgment, this collision of viewpoints underscores the obvious: although the text of section 365(a) plainly indicates that a trustee's rejection of a nonresidential 4Contrary to Mellon's characterization, In re Arizona Appetito's Stores, Inc., 893 F.2d 216 (9th Cir. 1989), is not on point. There, the Ninth Circuit merely observed that rejection of an unexpired lease can be accomplished only by an order of the bankruptcy court. Id. at 219-20 (dictum). The statement is correct as far as it goes but it does not go far enough. The issue here is not whether court approval is required under section 365(a) clearly, it is but whether a purported rejection becomes legally effective before court approval is secured. 10 lease is conditional upon court approval, the text is unclear as to whether that approval constitutes a condition precedent or subsequent to an effective rejection. Consequently, section 365(a) is ambiguous in this respect. See United States v. Gibbens, 25 F.3d 28, 34 (1st Cir. 1994) (A statute is ambiguous if it can be read in more than one way.). While the competing interpretations proposed by the parties are both reasonable renditions of the statute's language, we believe that section 365(a) is most faithfully read as making court approval a condition precedent to the effectiveness of a trustee's rejection of a nonresidential lease. Therefore, the date of court approval, not the motion filing date, controls. We are guided to this conclusion by several signposts. First and foremost, we think that the structure of the Bankruptcy Code and the nature of judicial oversight in the Chapter 11 milieu combine to make it highly likely that Congress intended judicial authorization to be a condition precedent to rejection. Bankruptcy is inherently a judicial process. From the moment that a debtor's petition is filed in the bankruptcy court, the debtor's property is in custodia legis. See 1 William C. Norton, Jr., Norton Bankruptcy Law and Practice 2d 3:2 (1994). From that point forward, the bankruptcy court is charged with overseeing the trustee's management in order to ensure that the interests of the bankruptcy estate are served. See 4 Norton, supra, 77:4. Judicial oversight of the reorganization process takes 11 two forms. Many routine decisions are made by the trustee without any specific clearance from the bankruptcy court, and are reviewed (if at all) only in the course of an examination of the trustee's overall stewardship (say, when a plan of reorganization is proposed or when an application for fees is filed). Other decisions are not effective unless they are specifically sanctioned by the court. In those instances, judicial approval is almost invariably a condition precedent to the trustee's action.5 Arranging matters in this sequence facilitates judicial oversight, minimizes false starts, and enhances the efficiency of the process. We can think of no convincing reason why Congress would abruptly depart from this tried-and-true formula. More importantly, we are confident that if Congress wished to inaugurate so radical a change, it would have taken pains to mark the trail brightly. A second reason for reading section 365(a) to require judicial approval as a condition precedent to rejection of a nonresidential lease is rooted in history. Congress enacted section 365(a) as part of the Bankruptcy Code of 1978, making court approval of such rejections obligatory for the first time. 5We note several examples. Before using, selling, or leasing property of the estate outside the ordinary course of business, the trustee must seek court approval. See 11 U.S.C. 363(b)(1). Unless each entity that has an interest in cash collateral consents, the trustee may not use cash collateral unless the bankruptcy court first grants authorization. See 11 U.S.C. 363(2)(A), (B). If the trustee seeks extraordinary post-petition financing, he must first obtain court approval. See 11 U.S.C. 364(b). And the trustee may not abandon property of the estate, even if burdensome, without obtaining court approval. See 11 U.S.C. 554(a). 12 The predecessor to section 365(a), section 70(b) of the Bankruptcy Act of 1898, 11 U.S.C. 110(b) (repealed 1978), and the applicable bankruptcy rule governing actions taken pursuant to section 70(b), Fed. R. Bankr. P. 607 (repealed 1978), did not explicitly require judicial approval of a trustee's rejection of a lease, and many courts held that the trustee, acting alone, could make a rejection stick. See, e.g., Villas & Sommer, Inc. v. Mahony (In re Steelship Corp.), 576 F.2d 128, 132 (8th Cir. 1978). The conclusion is irresistible that Congress, by changing the protocol in 1978, intended to involve bankruptcy courts more actively in the decisional process. We believe that this policy of increased involvement is better served by viewing judicial approval as a condition precedent to the effectiveness of a rejection instead of as a condition subsequent. In a related vein, we note that several courts have found support for requiring court approval as a condition precedent to rejection in two extant rules of bankruptcy procedure, namely, Fed. R. Bankr. P. 6006 and 9014. See, e.g., Revco, 109 B.R. at 268. Read together, these rules require a trustee who desires to reject a lease to file a formal motion to that effect. This, too, constitutes an innovation for, previously, the rules did not provide a formal procedure for rejecting leases. We think this is another sign that Congress intended courts to become more involved in the decisional process, and, thus, reinforces our vision of court approval as a condition precedent to a valid rejection of a nonresidential 13 lease. The third reason for our view is that reading the statute in the manner favored by the district court tends to reduce a bankruptcy court's order of approval to a bagatelle. So interpreted, the provision would trivialize judicial oversight of the rejection process. Court orders are customarily important events in the life of a judicial proceeding; they are the primary means through which courts speak, see, e.g., Advance Financial Corp. v. Isla Rica Sales, Inc., 747 F.2d 21, 26 (1st Cir. 1984), and they should carry commensurate weight. We see no reason for allowing a trustee to substitute his voice for that of the court. The trustee may sing all he wants, but it is the court that must call the tune. Cf. W.A. Mozart, Le Nozze di Figaro, Act 1, sc.2 (1786) (Figaro's Aria). Along the same lines, we think that the district court's valid, but voidable construct, see Thinking Machines, 182 B.R. at 368, is largely bereft of meaning. In the rejection scenario, the sole reason for seeking court approval is to cut off the debtor's post-petition liability, imposed by section 365(d)(3), under the unexpired nonresidential lease. If the bankruptcy court disapproves the trustee's motion for rejection, then the rejection never had any meaningful legal existence in the first place the trustee will remain liable for rent at the contract rate from the inception of the insolvency proceeding. As judicial approval will always be the last step in the rejection pavane, it follows that the trustee's repudiation of a 14 lease can never be valid in any meaningful sense until the court has acted. A final reason for our view stems from a concern that treating a rejection as valid, but voidable from the motion filing date forward would further ensnarl the tangles inherent in the complexities of modern commerce. If valid, but voidable were the rule, the parties could act on the trustee's notice, and their actions would have to be undone if the court later disagreed. Traditionally, attempts to unwind bankruptcy transactions after the fact have proven nettlesome, see, e.g., In re Stadium Mgmt. Corp., 895 F.2d 845, 849 (1st Cir. 1990); In re Texaco, 92 B.R. 38, 50 (S.D.N.Y. 1988), and we will not lightly assume that Congress intended to invite these myriad complications. This round trip back to the future serves to highlight the importance of factual certainty in the rejection process. In adopting a requirement of court approval, Congress overruled precedent that allowed trustees to show by informal conduct that they had either assumed or rejected leases (or other executory contracts, for that matter). Thus, the requirement seems to have been designed at least in part to remedy the problems attendant upon informal or equivocal rejections particularly the lack of clear notice to landlords as to when they could safely redeem and relet their property. See Gregory G. Hesse, A Return to Confusion and Uncertainty as to the Effective Date of Rejection of Commercial Leases in Bankruptcy, 9 Bankr. Dev. J. 521, 531 15 (1993) (discussing legislative history). Treating a trustee's rejection of a nonresidential lease as valid, but voidable tugs in the opposite direction, promoting uncertainty rather than dispelling it.6 In an effort to resist the force of these four reasons, TMC counters with two principal points. First, it notes that the language used in section 365(a) is atypical. Congress traditionally employs the vocabulary of prior authorization when inserting a requirement of court approval in the Code. For example, the statutes cited in note 5, supra, all say that the court, after notice and a hearing, may authorize particular actions. TMC visualizes the somewhat different wording of section 365(a) as betokening a different mechanism. But it is risky to read too much into Congress' use of an alternative formulation, especially when the new language is opaque. We are unwilling, without more, to construe the mere absence of an explicit reference to securing court approval in advance as an intentional departure from the pattern of prior court approval woven throughout the fabric of the Bankruptcy Code. 6We do not think that it is any real answer to insinuate that valid, but voidable is workable because a bankruptcy court will usually support a trustee's desire to scrap an unexpired nonresidential lease. The magnitude of the harm that a landlord might suffer if the bankruptcy court subsequently disapproved a particular rejection after the landlord diligently relet the rejected premises, or incurred substantial expenses to rehabilitate or advertise them, brings into focus the potential unfairness inherent in adopting the motion filing date as the effective date of a rejection. We have no reason to think that Congress intended to add an element of Russian roulette to the already tumultuous effects of the reorganization process on commercial landlords. 16 Next, TMC complains that using the date of court approval as the termination date of a nonresidential lease burdens the scarce resources of bankruptcy estates. In this respect, section 365(a), in conjunction with section 365(d)(3), departs from one of the general themes of Chapter 11 in that it hinders the trustee's efforts to rid the bankruptcy estate of unnecessary baggage. But general themes are, by definition, general; they are not necessarily controlling in all specific instances. Since the S/C Amendments purposefully discounted this general theme in relation to the specific circumstances presented by nonresidential leases, TMC's policy argument is best directed to the legislative, not the judicial, branch. We need go no further. For the reasons limned above, we hold that a rejection of a nonresidential lease under section 365(a) becomes legally effective only after judicial approval has been obtained.