Opinion ID: 788706
Heading Depth: 2
Heading Rank: 2

Heading: The bankruptcy court's decision to grant Debtor's motion.

Text: 46 [I]n most cases a lease will be considered rejected as of the date of entry of the order approving the rejection, and only in exceptional circumstances ... will the court adopt a retroactive date. In re O'Neil Theatres, Inc., 257 B.R. 806, 808 (Bankr.E.D.La.2000). The bankruptcy court below identified four factors supporting its conclusion that exceptional circumstances justified retroactive rejection: (1) the immediate filing of Debtor's motion to reject the leases; (2) Debtor's prompt action in setting that motion for hearing; (3) the fact that Debtor never occupied the premises; and (4) Pacific Shores's motivation in opposing rejection of the leases nunc pro tunc to the motion filing date. Pacific Shores challenges all but the first of those factors. 47
48 The bankruptcy court began by commenting that Debtor had moved for rejection of the leases immediately upon filing its bankruptcy petition and had scheduled a hearing virtually as soon as possible: 49 It wasn't perfect. It wasn't done absolutely as soon as possible, but it was done without any delay. There was a holiday in here.... There was neither any deliberate use of a long notice period to keep their options open nor in fact as I can see it any indifference to the timing concerns of the landlord. This is virtually as soon as possible in this particular case. 50 Pacific Shores takes issue with the bankruptcy court's conclusion that Debtor set its motion for hearing virtually as soon as possible. 51 The bankruptcy court itself noted that Debtor should have asked Pacific Shores to stipulate to an immediate rejection of the leases upon filing for bankruptcy. It is, of course, speculative whether Pacific Shores would have agreed, knowing that, by doing so, it would lose $1 million in administrative rent. But even if that option had been available, we cannot say that the bankruptcy court's finding that Debtor moved swiftly to reject the leases is clearly erroneous. The minimal delay in bringing the motion to a hearing was due in part to factors outside Debtor's control, including a court holiday and the fact that a creditors' committee had yet to form by the time of the first day emergency motions. 52 Pacific Shores nonetheless argues that, in granting Debtor's motion, the bankruptcy court improperly shifted the burden of justifying delay to the landlord. As we noted in Pacific-Atlantic Trading, [b]y requiring the trustee to timely pay the debtor's rent, Congress clearly placed the burden on the trustee to promptly and properly reject the lease if it has no intention of assuming it. 27 F.3d at 405. Several other courts also have interpreted the amended § 365(d)(3) as a mechanism to shift to the debtor the costs of delay. See, e.g., Paul Harris Stores, 148 B.R. at 310; Federated Dep't Stores, 131 B.R. at 815. 53 This argument misunderstands the import of the bankruptcy court's finding. The bankruptcy court did not require Pacific Shores to bear the costs associated with a delay. Rather, the court concluded that there was no appreciable delay in the first place. That conclusion is consistent with the approach taken by other bankruptcy courts in similar situations. In Paul Harris Stores, for example, the court held that the effective date of rejection was the date on which the court approved the motion to reject, in part because [t]he gap i[n] this case — four months, due in part to extensions of time — could hardly be considered small. 148 B.R. at 311. 4 By contrast, the court in In re Amber's Stores granted the motion to reject as of the motion filing date, where the debtor served a motion to reject the lease as soon as possible.  193 B.R. at 827 (emphasis added). 54 The bankruptcy court found that Debtor brought its motion before the court at the earliest practicable date. See Thinking Machines, 67 F.3d at 1028 (explaining that retroactive relief in § 365 cases encourages resolution of a motion to reject at the earliest practicable date). That finding is not clearly erroneous, nor was the court's reliance on it an abuse of discretion. 55
56 The bankruptcy court next looked to the fact that Debtor never occupied the leased premises. 5 The circumstances of this case are truly unusual; Debtor paid rent on the two leased buildings for more than a year without ever occupying either one. Although we have found no identical cases, those that discuss a tenant's decision whether to vacate the leased premises provide an instructive parallel. In In re Chi-Chi's, Inc., the court denied retroactive relief in part because the tenants remained on the premises even after the entry of the court's order. 305 B.R. at 399. Similarly, in In re Cafeteria Operators, L.P., 299 B.R. 384, 394 (Bankr.N.D.Tex.2003), the court looked to each one of the debtor's subleases individually and found that the equities of the case allow rejection retroactive to the later of 1) the date Debtors' Motions were filed or 2) the date the leased space was vacated. Indeed, most cases approving the rejection of a lease retroactively to the motion date highlight the fact that the debtor has vacated the premises. See, e.g., CCI Wireless, 297 B.R. at 137 (noting that the debtor vacated the lease premises before or shortly after the date of filing the Chapter 11 case). 57 Pacific Shores stresses the legal consequence of the automatic stay. Whether or not the bankrupt tenant has vacated the premises, the landlord cannot re-let the premises while the automatic stay is in effect. So, argues Pacific Shores, occupancy is irrelevant. 58 But the bankruptcy court focused on the practical effect, rather than the legal significance, of the lack of occupancy. By not occupying the premises, Debtor made it easier for the landlord to re-let [the buildings]. Nothing in the statute, in the precedents, or in logic precludes the bankruptcy court from considering the practical effects of a tenant's lack of occupancy when balancing the equities in the context of § 365(d)(3). Again, we find no abuse of discretion. 59
60 Finally, the bankruptcy court note[d] that the landlord's opposition was to any [ nunc pro tunc ] effect generally without any suggestion here that this process should be speeded up so that ... the landlord could get its indefeasible right to relet the premises more quickly. The court granted the relief requested in part because it was convinced that the opposition to this relief is motivated by the landlord's interest in running the administrative rent ... [rather than by] a concern to get this indisputable right to start re-letting the premises as quickly as possible. 61 A landlord's conduct and motives are relevant to a bankruptcy court's equitable deliberations. For instance, Jamesway rested its decision to approve the retroactive rejection of a lease exclusively on the landlord's delay of the hearing on the debtor's motion. 179 B.R. at 38. Although Pacific Shores's conduct here is in no way comparable to the landlord's in Jamesway, it does not follow that Pacific Shores's conduct, or its motivation, is altogether irrelevant. 62 Neither is the amount of rent necessarily irrelevant. Pacific Shores argues that the bankruptcy court, in stating that Pacific Shores was more concerned with obtaining administrative rent than with re-letting the premises, impermissibly weighed the amount of rent in arriving at its decision. Indeed, the court noted that [t]his case wouldn't be interesting and wouldn't even be here except for a fairly interesting amount of rent per month. 63 Relying on Pacific-Atlantic Trading, as well as our later decision in Cukierman, Pacific Shores contends that we have placed that factor beyond the consideration of the bankruptcy court. Pacific-Atlantic Trading held that the contractual rate of rent, rather than the value of the trustee's use of the property, was entitled to administrative priority under § 365(d)(3). 27 F.3d at 405. Cukierman extended that holding to the context of a loan disguised as further rent under a lease obligation. 265 F.3d at 850. Adhering to the reasoning of Pacific-Atlantic Trading, we held that the lessor was entitled to the contractual rate of rent even though the rent in question was arguably completely unrelated to Cukierman's use of the property. Id. Taken together, those two cases establish a bright-line rule under which the administrative rent owed under § 365(d)(3) encompass [es] all obligations contained in a bargained-for agreement regardless of any benefit to the debtor. Id. at 851. 64 That bright-line rule governs the calculation of administrative rent, but it does not render the amount of rent irrelevant to the equitable balancing that a court must perform when deciding whether to approve a motion to reject a lease retroactively. As the district court succinctly explained, 65 for purposes of calculating administrative expenses under section 503(b)(1), the fair value of nonresidential leaseholds is irrelevant; in that circumstance, the contract rate governs. But these provisions do not preclude consideration of the amount of rent that would be due in determining whether the balance of equities weighs in favor of retroactive application of rejection. 66 At Home Corp., 292 B.R. at 203 (citation omitted). We agree with the district court that the bankruptcy court had the discretion to consider both Pacific Shores's motivation in opposing retroactive lease rejection and the amount of rent owing under the contract. 67 As did the First Circuit in Thinking Machines, we eschew any attempt to spell out the range of circumstances that might justify the use of a bankruptcy court's equitable powers in this fashion. 67 F.3d at 1029 n. 9. We likewise eschew any attempt to limit the factors a bankruptcy court may consider when balancing the equities in a particular case. We need not and do not decide whether any one of the factors on which the bankruptcy court relied, standing alone, would justify an exercise of discretion. But in combination those factors supported the court's equitable decision.